I hate to break it to you, but there IS such a thing as a stupid question. Or at least, when someone asks a question, they may not realize they are asking the WRONG question. A friend of mine who contributed some feedback on my last book stated, “There’s really no excuse for giving simplisitic, bad, but technically correct answers to mis-guided questions….answers like these only cause damage.”
In a Forbe’s article where the author tries to answer the question of whether or not you should buy permanent life insurance as an investment, her conclusion was no. She cited the classic issue of costs, but never mentioned what happens if you did something like overfund the policy. She also didn’t compare whole life vs. EIUL vs. VUL, but instead seemed to pick a policy with the worst characteristics. She did make a point of listing areas where people need insurance for it’s standard usage of covering things like estate taxes, family members in need, etc., but when looked at for investment purposes, the whole point of the article, she stuck to her guns that permanent was the most expensive and least useful.
My buddy, Jeff Brown (a real estate broker) has several axioms, including: It’s not finding the answers to all the questions you have that’s the problem. It’s the answers to the questions you never knew to ask that end up bitin’ you on the butt.
Several people in the comments tried to point out the flaws in the writer’s assumptions, but invariably her response was to fall back to what the caller originally asked, and not really pursue what version of permanent insurance would have the best benefits and least costs. If she had, her conclusions might have been dramatically different.
“That may be true. I used the numbers from the illustration provided to the caller from the financial adviser.”
By limiting this discussion to the illustration the caller had, we are off to a bad start. A majority of agents and financial planners either don’t know how to set up life insurance with the costs dialed down, or they won’t due to the cut in premiums they are forced to accept. If the writer had been willing to set the illustration aside and talk about this factor in policy writing, many readers may have discovered another dimension in cash value life insurance. This may be a strong hint that perhaps the writer doesn’t know about overfunded policies, which taints the whole article.
“I assumed a variable life product because that’s what the caller was asking about in this particular situation. Yeah, you’re right that the average investor earns around 3-4% but with education I believe they can get closer to the long term stock market averages of 8-9%. Finally, I used a Roth 401(k) in this example to take away the issue of higher taxes in the future but that certainly can be a factor for someone who can’t contribute to a Roth. Of course, there has also been talk of removing the tax benefits of life insurance cash values so there’s risk there too.”
First of all, VULs (Variable Universal Life insurance) have the same systemic risk as buying mutual funds, so I don’t favor them. Their principal value can fall. EIULs don’t have that risk. Your value never goes negative. When they drop in value (not if), VUL holders will be inclined to move their money to another fund inside their policy, which is just as bad as rebalancing mutual funds inside a 401(k). One key benefit in considering permanent life insurance is to insulate ourselves from market shocks and negative years.
Second, the writer is pitching the same thing every financial advisor serves up to prospective clients. She is saying we can beat the historical average. At least she knows that people average 3-4% ROI with mutual funds, as cited in the Dalbar Report. It is an abysmal rate that doesn’t build retirement wealth. Heck, beating inflation would be a lucky draw. But Wall Street is famous for telling us that “you can’t do it yourself, because the odds are against you…but not me your financial advisor.” For the author to set aside this historical fact and suggest we can beat history compared to everyone else seems to be retreating back to Wall Street’s sales propaganda.
Third, 401(k)s have some of the highest costs, compared to owning mutual funds straight up. Your choices are limited as well. But…at least she isn’t trying to tell us that the stock market averages 12%.
Finally, she wants to spook us by suggesting that the tax free nature of cash value life insurance is up for grabs. There is a long standing history that shows this is not likely. If it were to happen, a lot of other things would be shook up as well, and I don’t know anyone who can devise a plan to handle that much upheaval.
“There may indeed be additional benefits from using whole life but I just wrote about what the adviser told the caller.”
This is the part that bugs me the most. In the end, she seems to actually accept that there may be benefits to cash value life insurance if done correctly. Or maybe she just wanted to stop arguing. She just chucks it all out and tells us that her article was meant to ONLY discuss the caller’s quote. What value is it to discuss a bad quote?
This makes the whole article a waste of time, because we aren’t really discussing the pros and cons of storing wealth in cash value life insurance. Instead, we are confined to looking at one badly written insurance contract aimed at serving the agent’s best interests.
The author is sticking with a poorly constructed insurance contract that has the most insurance for the given premium; a common situation. This perpetuates the myth that all cash value life insurance is a rip-off when in reality, it can be the most cost effective way to store wealth. If only the writer had answered the question that WASN’T asked.