Why Your Whole Life Insurance (Probably) Won’t Ever Profit

Mindy:
Welcome to the BiggerPockets Money podcast, where we interview Jim Dahle from The White Coat Investor and talk about life insurance. It’s going to be fun.

Jim:
But what is not a financial catastrophe for most people is dying at age 92. That’s just not a financial catastrophe. It’s an expected event, right? We all expect that to happen. Presumably no one is depending on your income when you’re 92. So do you need insurance when you’re 92? No. And should you buy insurance that you don’t need generally? No, you should not.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me, as always, is my living co-host, Scott Trench.

Scott:
Oh, and with me, as always, is my universally appreciated co-host, Mindy Jensen.

Mindy:
Ooh, that was a good one. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or not purchase whole life insurance, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
You just gave away the whole show, Scott. Today we’re talking with Jim Dahle. We’re talking about whole life insurance and Scott just spoiled it. We are not fans, although there are certain cases when it is a good idea. So we are going to dive into that in just a moment. But before we do that, we’re going to go into our money moment. This is a new segment where we bring a money hack tip or trick to you to help you on your journey to financial independence. Today’s money moment is a really good one that I need to start doing. On your grocery list, include a do not buy section. If you constantly are buying similar things at the store, do a check before you leave the house and write down the things that you already have so you don’t buy duplicates.

Scott:
Love it. Yeah. And as a reminder, we are always looking for guests to come on the show and share their money story or to be coached on our Finance Friday episodes. So if you’re interested, go to biggerpockets.com/guest or biggerpockets.com/financereview.

Mindy:
Okay, before we bring in Jim, let’s take a quick break. And we are back. Jim Dahle is emergency room physician and the founder of The White Coat Investor. After multiple run-ins with unscrupulous financial professionals early on in his career, he embarked on his own self-study process to become financially literate, and then he realized nobody else was talking to doctors either. So he decided he was going to create The White Coat Investor so he could help educate doctors with their finances. He’s now the CEO, a columnist and the host of their podcast. Jim, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Jim:
Thank you, Mindy. It’s wonderful to be here with you and Scott.

Mindy:
Let’s go over a bit of your career and your history. What is your background and where does your journey with money begin?

Jim:
My background really is the same as most doctors. I went to college and I was a molecular biology major, nothing special. Went to medical school, really still had no interest in anything financial, and then went to residency. And about halfway through my residency, I realized that every interaction I’d had with a financial professional had ended badly, whether that was a lender, whether that was a realtor, whether that was a financial advisor or a insurance salesman or recruiter or whatever. I’d always been taken advantage of, and I didn’t like it. And so I decided I was sick of it. The straw that broke the camel’s back was a financial advisor that I thought was fee only, ended up being fee-based, and I learned the difference between those terms. And I decided if I don’t start learning this stuff, this is just going to happen throughout my whole career.
So I started reading. Online, forums, blogs, going to the library, going to use bookstores and just picking up books and reading them. And I read a lot of terrible books, but I found some good ones as well, and eventually realized this stuff’s not that complicated. You can learn it, and nobody is. If you have a combination of financial literacy and financial discipline, it’s like having a superpower. And so it was pretty cool to learn that stuff, start applying it in my life as I came out of residency, kind of hit the ground running, and really benefited me a lot.
Over the years, I realized I wasn’t doing as much learning online as I used to be. I was doing a whole lot more teaching, and nobody else was teaching it to doctors, so I decided I got sick of typing the same stuff into the internet over and over again and started to blog so I could just post a link. Basically, here’s where I explained that. And that was the origin of The White Coat Investor. It was a business from day one, but it’s been very much a kind of missionary zeal behind it for the last 12 years of just trying to help my peers to stop doing dumb stuff with their money.

Mindy:
You just said something very interesting. You said, I’ve discovered that money isn’t that hard and finance isn’t that hard, and once you learn about it, and it can be so daunting because if you start from zero and you’re like, “Ooh, it’s so complicated.” It is complicated until you learn about it and then you discover it’s really not that complicated, just like learning another language, it’s really complicated until you get into it and then you discover it’s really not that complicated.

Jim:
The language analogy is perfect, right? You say it’s like another language. It is like another language. There’s all these terms that you have to understand. And until you understand the definitions of the terms, you can’t have a reasonable conversation with somebody in the field or on the subject. And I have doctors come to me all the time and they’re using the wrong words. They’re saying re-characterization when they mean conversion, or they’re saying rollover when they mean this or whatever. And they just don’t know the words to use to have this conversation. And it’s a lot like medicine that way. I mean, you’ve been to the doctor’s office and you had no idea what the doctor was talking about because they were talking doctor-ese.
And if you don’t translate that down out of whatever technical field it is into terms that people understand or you don’t teach them the terms that you’re using, you just can’t even have a conversation about it. So you have to learn the language before you can start learning the material, but once you do that, you realize this is not as hard as a lot of technical fields out there. Whatever you are, if you’re a high income professional of some kind, law or engineering or medicine or dentistry or whatever, it was probably far more difficult to learn your field than it will be to learn how to manage your money.

Mindy:
Absolutely.

Scott:
I think that the prime example of the doctor-ese of the finance world is going to come in the category of whole life insurance, and that’s one of the reasons we wanted to talk to you today in particular is because I think you have a handle. You are so familiar with this and you have beaten up the case for life insurance, for whole life insurance so thoroughly and so meticulously that we wanted to have you come on and unpack that for us because I know that a lot of, not just doctors, but a lot of people in general are anxious about that topic. It’s something that it feels like it’s very high stakes, it’s sold very hard. Could you give us your overview, the opinion you have on this product? Tell us what it is, how it works, and who should use it, when you should use it, or when you should run away as fast as you can?

Jim:
Well, let me just, from the 30,000-foot view, start at the very beginning. I am not against insurance. I am very much a fan of insurance. I think if you are facing a financial catastrophe, you should insure very well against it. And there are financial catastrophes out there. You becoming disabled during your career, especially for a high income professional like a doc, that’s a huge financial catastrophe. You dying while somebody else depends on your income. That’s a huge financial catastrophe. Your house burning to the ground. For most of us, that’s a financial catastrophe. Becoming ill or injured and ending up in the hospital, running up hundreds of thousands of dollars of bills can be a financial catastrophe. Getting sued, either in your professional life or your personal life. Again, a financial catastrophe. I think you should insure and you should insure well against all of those things. When it comes to life insurance, for the most part, people have a need for life insurance, if they’re married or have kids or whatever, that lasts a few decades and they should insure very well during those few decades.
I’m talking seven figures of insurance. Most people should carry seven figures of life insurance. And that’s not that expensive if you buy it when you’re young and healthy, six or $700 a year is all it cost to have $1 million in term life insurance. But what is not a financial catastrophe for most people is dying at age 92. That’s just not a financial catastrophe. It’s an expected event. We all expect that to happen. Presumably no one is depending on your income when you’re 92. So do you need insurance when you’re 92? No. And should you buy insurance that you don’t need? Generally, no. You should not. You should insure well against financial catastrophes, but you don’t need to insure your iPhone falling in the toilet, right? You can afford to replace that. And what whole life insurance is is a lifelong insurance policy. So whenever you die, whether you die at 25 or 45 or 70 or 92, it is going to pay you, or you pay your heirs, really, pay your estate, but it’s going to pay out a death benefit.
And of course, if you want something that’s going to pay out no matter when you die, that’s going to cost a lot more than something that’s only going to pay out if you die between age 30 and age 55 or 60 or whenever you become financially independent. And so naturally you would expect whole life insurance to cost a lot more than term life insurance. And indeed it does. Depending on your age and health status and that sort of thing, it’s typical to pay eight or 10 times or 20 times as much for the same death benefit. If you die at 55 and you got $1 million in term insurance, you get $1 million. If you die at 55 and you got $1 million in whole life insurance, you get $1 million. That’s it. It’s the same death benefit.
And so that is the overview of whole life insurance. And people think about it that way and that’s the way most of them should think about it. You go, “Oh, of course I don’t need to have insurance after I’m 65. Of course that’d be expensive. All kinds of people are keeling over after age 65, I’m not going to buy that.” The problem comes in that there is a lot you can do with whole life insurance besides just get a death benefit. Because the way most of these cash value life insurance policies work is they accumulate cash value as you go along, and that is useful. Obviously everybody likes cash, and so it’s good to have cash value. That’s not a bad thing. But if you pay into a policy, a whole life policy for 10 or 20 years, maybe you’ve got some cash value there, maybe it’s $50,000 or $100,000 or whatever it might be, and you are actually allowed to borrow against that. You can get a loan from the insurance company with that cash value as the collateral.
And so that introduces all kinds of opportunities. You can borrow against it. You don’t have to go to the bank to borrow, and it allows for all these other uses of whole life insurance. Somebody might want to use it as some sort of retirement savings or might want to use it as a college savings or to fund the purchase of real estate or as some sort of emergency fund. There’s all these other uses now you can use the policy for. And so that’s how it gets sold. It gets sold to people who don’t need a death benefit when they’re 92. It gets sold to them as another retirement account. It gets sold to them as a college savings plan. It gets sold to them as an emergency fund. Gets sold to them as you don’t have to go to the bank now and borrow money, you can just get it out of your whole life policy.
And the truth is for almost every one of those uses, there is a better method than using a whole life insurance policy. And that’s God’s honest truth about whole life insurance. I don’t sell it, I don’t benefit if you don’t buy it. I don’t benefit if you do buy it, but that’s the truth about whole life insurance. And you can dive into the details of all these different uses and why whole life is maybe not the best way to meet that need. But that’s kind of the broad overview.

Scott:
So Jim, why is whole life insurance sold so hard? Why are there so many proponents that are so hardcore about this product?

Jim:
Well, you’ll find that 95% or more of the proponents, it might be 99% of the proponents sell it for a living. Okay? So there’s this huge conflict of interest.

Scott:
Is this a lucrative way to make a living?

Jim:
People may not realize how lucrative it is. The typical commission on selling a whole life policy ranges from about 50% to 110% of the first year’s premium. So if your premium for this policy is 20 or $30,000 a year, which is not unusual at all in my audience of physicians, that person is getting paid 10, 20, $30,000 to sell you this policy. Yes, they’re going to try really hard. How many of those do you think they need to sell a month to have a fantastic income? Not very many. So there’s this huge conflict of interest. There are some people out there, including many of those who sell it, who don’t really understand how it works, and they think about all these different uses of it and think it’s a Swiss Army knife of financial products, so of course it must be awesome because look at all the different stuff you can use it for. But when you dive into the details, that’s where you find the devil. The devil’s in the details and it’s not very pretty when you do.

Mindy:
What is that quote? It’s difficult to get a man to understand something when his salary depends upon him not understanding it.

Jim:
Exactly. I think that comes from a novel about the meat packing industry is what it came from originally, but it can be applied to just about anything.

Scott:
So I just want to chime in here that I host a podcast here with Mindy on financial responsibility, and I got referred to a financial advisor through a lawyer, whatever, to talk about some things. And sure enough, the conversation goes around and I’m like, this is all reasonable, up until, “Oh, you should insure, you should get a whole life insurance policy.” Alarm bells start going off. You should get a policy not just to put you to financial independence, but to insure against all of the future income earning potential that you have in your career. Have you heard that one before?

Jim:
Well, I mean, that line can be used to justify the sale of lots of types of insurance, whether it’s disability or term life or whole life insurance. They have an incentive to get you to buy as big of a policy as you will buy. But when you’re buying insurance, insurance is not a good deal. People need to understand insurance is a bad deal. It’s always a bad deal because it has to be a bad deal. Think about what happens. You pay a premium, you and 1,000 other people pay a premium. And the insurance company takes that premium, it pays for all of its expenses, including commissions to its agents, its overhead and all that sort of stuff. It probably wants to make a profit if it’s a for-profit insurance company. So it’s going to take a little bit of profit. And then of course it’s got to pay any claims that come out, all out of that premium.
So on average, insurance is a losing proposition. On average, you’ll always come out behind buying insurance. Now, I’m not saying don’t buy insurance when you need it, but recognize that it’s a bad deal for you. And so you shouldn’t buy any more than you need. And indeed, I think if the plan, let’s say you’re married and the plan is for your spouse not to have to work if you die, if you get hit by a bus tomorrow. If that’s the plan, then yes, that term life insurance policy needs to be large enough that they become instantly financially independent when you die, and they can live off the combination of what you’ve already saved plus the life insurance proceeds for the rest of their life, if that’s your goal. But do you have to absolutely replace every dollar you ever earn from here on out? No, you don’t have to do that. You just got to look at what your needs are and buy enough insurance to cover those.

Mindy:
As we were preparing this show, my producer Kailyn said, “I don’t understand the purpose of this product.” Who is whole life insurance for and who doesn’t benefit from it?

Jim:
Okay, well, this is the thing that makes it hard because there are a few people and a few situations where it does make sense. But if you will take as the general rule that you don’t want this, that it is a product designed to be sold and not bought, that the person talking to you has a huge conflict of interest selling it to you. If you will have that as your general background mindset when you interact with anything and anybody about whole life insurance, you’re going to be right 99% of the time. But there are these situations where it can be useful. Let me give you an example. Okay, let’s say there are two older business partners and they own a business. And it’s a great partnership, it’s a great business, they love it, but their plan is if one of them dies, they want the other person to basically get the business.
They don’t want to be in business with one of the heirs, one of the crazy spouses, whatever. And they’re kind of older. And so term life insurance, that would pay off and produce money to do a buyout of the other partner’s estate, is kind of expensive at that age. So they decide, well, let’s do that with whole life insurance. So the business buys a whole life insurance policy on each of them with the idea being, if one of them dies, that whole life insurance policy proceeds are used to buy out that partner’s heirs. And so the person that’s remaining can keep the business. It’s a great use of whole life insurance. Here’s another example. Some people in estate planning want to get some assets out of their estate. They keep themselves below the estate tactics exemption amount, and so they put it into an irrevocable trust.
Once it’s in the irrevocable trust, all the growth in that account in that trust is not subject to estate taxes. And so if you have something that’s going to appreciate a lot a business, you try to get it into a trust like that before it really booms. Investments can go into a trust, but a lot of people don’t like the fact that trusts get taxed pretty heavily. You hit the top tax rate in a trust with pretty low amounts of income. I think it’s less than $15,000 a year and all of a sudden you’re in the top tax bracket in that trust. And so sometimes what people do is they put a whole life insurance policy inside that irrevocable trust because it grows in a tax protected way, there’s no income being kicked off from it that you have to pay taxes on. The dividends from it are treated essentially as return of capital as though you overpaid the premium.
And so it basically grows, in that respect, tax-free. And then whenever you die, the death benefit comes into the trust and goes to the trust beneficiaries. And so that’s a use that some people find for it. Occasionally you’ll find somebody that likes to do, and these are trademark terms, bank on yourself or infinite banking or leap. And these are basically systems where you can borrow from your whole life insurance policy rather than going to a bank to borrow money. And in the short run, it’s not a very good deal. In the long run, you might earn a little bit more on your cash doing one of those sorts of policies. And so when I run into real estate investors that are interested in whole life insurance, that’s usually the use that they are thinking about. And so that can be a reasonable use as well.
Those are probably the three most common ones that I see people out there. And occasionally someone just wants a permanent death benefit. They got a disabled kid and they’re not quite financially independent yet. They’re 68 and they’re still working, and they want that kid to be taken care of when they pass and they’re like, term really doesn’t make sense for me at this age. So I’m really glad I picked up that whole life policy at 45 because the premiums are still level. You’ll see occasionally people like that. I think most of the time even people with disabled kids don’t need a whole life insurance policy, but that’s not a terribly bad idea for using it. But just being a doctor, just making a lot of money, just being a real estate investor, these are not reasons to buy a whole life insurance policy.

Scott:
Can we dive a little deeper into that third use case for the real estate investor with infinite banking? What do you have to believe and what do you have to do to actually make that a reasonable investment?

Jim:
Okay, so here’s the problem with these systems. They are sold as like this life-changing financial product that everything’s better once you buy this thing. And of course, that’s just people trying to earn a commission. But if you boil down to it, if you really dive through all the details, what you are trading is something that gives you a bad return for five to 10 years, in exchange for earning a little bit more on your cash in the long run. That’s essentially what you’re getting. That’s the swap. Forget everything else they tell you about it, that’s what you’re swapping. And if you’re willing to deal with the hassles of life insurance, of buying the policy, funding the policy, dealing with the negative returns for the first five plus years, what you get is you make 4 or 5% on your cash instead of 2 or 3%.
Well, right now, you can go make 4.5% in the money market fund anywhere. But a year or two ago, you can see why that would be an attractive proposition to be able to make 4% on your cash long term instead of the 1% you were making on your high yield savings account a year ago. But you have to make sure, if you’re going to do this, anytime you buy a whole life insurance policy, it’s like getting married. It’s till death do you part or it’s going to cost you a lot of money to get out of it. So you want to do appropriate amount of due diligence. If you’ve only looked at one policy, what in the world are you doing buying it? That’s like buying an investment property with only ever looking at one property. It’s crazy. And so if you haven’t gotten opinions from more than one person, including one who does not benefit from selling you a policy, and you haven’t looked at multiple policies, you’re probably not going to buy the right one.
But there are policies that are designed to do this, to do this bank on yourself, infinite banking, whatever you want to call it type of thing. And they basically have three characteristics. The first one is that most of the money going in there, or at least a large chunk of the money going in there is not regular premium buying regular whole life insurance. It is what’s called paid up additions. And so what you’re trying to do is get more money in there quicker, and the paid up additions pay a lower commission than the regular insurance policy. And so it’s a little bit of a more cost-effective way to buy the policy. So that’s number one. Number two, you want the policy to be non-direct recognition. Now, a typical whole life policy is direct recognition. And what that means is when you borrow money against it, that money that you borrowed out of or against the policy, you’re no longer being paid dividends on that money that you’ve borrowed out.
A non-direct recognition policy still pays you the dividends. So you borrow this money out and it’s still paying you as though the money’s still there. And so that’s not all policies. And if you’re going to do this where you’re repeatedly borrowing against your cash value and paying it back, you want to make sure that you’ve got a policy that actually recognizes the borrowing against it as non-direct recognition. And then the last thing is you want wash loans, which means that the dividend rate it’s paying is about what it is costing you to borrow the money. Because when you borrow against your whole life insurance, anytime you borrow money, it’s tax-free. And they make us, “Oh, it’s tax-free, get your money out tax-free.” Well, anytime you borrow money, it’s tax-free. You borrow against your house, it’s tax-free. You borrow against your car, it’s tax-free. You borrow credit card money, it’s tax-free, right?
This is not some new thing that’s fancy about whole life insurance, but you want it to be interest-free, and it’s not interest-free. When you borrow your own money out of this policy, you’re paying interest. But at least if it’s a wash loan, if the interest rate is what the dividend rate is on this policy, then at least it is not really costing you anything to borrow it to get your money out. So in that respect, it’s kind of like withdrawing out of a bank savings account. You pull it out of your savings account, you’re earning 5% on it, it’s costing you 5%. That’s the same as if you pulled money out of a savings account. And so what this is it’s functioning as a savings account. And for the first few years, it takes a while to break even on whole life insurance because you got to pay this huge commission.
And so even the best designed policies, they still don’t break even for four or five years. You might have paid $100,000 in premiums over the last five years and your cash value if you walked away at this point might still only be 92,000. You’re actually behind. And so for the first five or 10 or 15 years, you’re behind where you would be if you just put that money in savings. But after that, you’re probably ahead in most situations assuming you bought a policy that’s actually designed to do this. And then instead of pulling money out of your savings account or trying to get a loan from a bank, you’re just borrowing against your whole life insurance policy. So you might borrow 100,000 against the policy, buy a property. As that property makes money, you pay that loan back, and then you pull it out of there and buy another property. That’s how it might be used by a real estate investor.

Mindy:
Are those policies available now with the wash loans and the, I can’t remember what you said, the still earning dividends even if you borrow against it?

Jim:
Yeah, the non-direct recognition. Yeah, you can buy them.

Mindy:
You can still buy them. Okay.

Jim:
Yeah, you can buy them. They haven’t gone away or anything. It’s not every policy though. You got to recognize that Joe Blow walking in from Northwestern Mutual or New York or whatever, walks in and tries to sell you this policy so he can make his $30,000 this month, that it may not be the policy you’re looking for. And so it helps to have someone that’s been doing this for a while that knows exactly what you want, but this is on you too. You’ve got to make sure the policy has those features because they don’t all have those features. Now, it’s not like those features are free either, right? I mean, if you’re going to get non-direct recognition loans, you’re probably giving something up, and it’s probably the dividend rate. You probably have a little bit lower dividend rate on that particular policy. So in order to be able to borrow money out against it routinely like that, you may have a slightly lower long-term return if you didn’t borrow the money out of the policy.

Scott:
For so thoroughly debunking the 99% of use cases of whole life insurance products, you are very knowledgeable about the various use cases in that tiny 1%, which I find really interesting here.

Jim:
The problem is these agents, these salesmen, what they do is they bounce from one use to another until they find one that jives with you. And then you’re like, “Oh yeah,” and then they sell the policy. They’re very good at it. The only way to win this argument with the whole life insurance salesman is to stand up and walk out of the room. You cannot win the argument if you stay there in that chair in their office. You’re not going to convince them it’s not a good idea.

Scott:
The whole life insurance agent is not listed. They’re not presenting themselves as a whole life insurance salesman. They’re presenting themselves as your financial advisor, right? Your CFP. And it’s implied in the conversation with these folks many times that they’re going to have your best interest. They’re your financial planner, you trust them with your financials, but it’s not a fiduciary role in most cases for most folks selling these policies, correct? And if so, who should I go to if I’m in one of the very rare use cases that whole life insurance applies to that is not… Can I have someone assist me in purchasing this that is not at a commissioned salesperson? How would I go about doing that?

Jim:
Not very easily. You can’t. They’re trying to move in a direction where insurance sales may be commission free, but there’s not very many of those out there, and there aren’t a lot of people that advise primarily on insurance. So if you want this, you’re going to have to buy it from a commissioned agent. And that’s okay. You buy your car from a commissioned agent. You go down to the Ford dealership and you buy an F-250. You know that guy knows all about F-250s. He’s going to tell you about all the features and he’s going to tell you this, “It’s better than the Chevy because of this and this, the Chevy’s a little better here, but overall the Ford’s a better deal.” And that’s okay and you buy the truck from him. That’s fine, right? That’s not a bad thing in life. Lots of people make money with the commission. There’s lots of people out there that are real estate agents, they get paid on commissions. That’s not an evil thing to get paid on commissions.
You just got to recognize that if your question is, should I replace my car? And you ask that question to a car salesman, the answer is yes, and you should replace it again next year. You can’t ask them that question. Should I buy a policy? You can ask them to tell me about the features of this particular policy. Or if it’s an independent agent, you can tell them, this is what I want to do with the policy. What policy’s going to be the best one for me? But if you ask him, do I need a $20,000 a year policy or a $30,000 a year policy? The answer’s 30,000. And you just got to recognize that huge conflict of interest, when you’re dealing with a commissioned agent and not a fiduciary financial advisor that you’re paying a fee to give you unconflicted advice. That is not what you’re getting when you’re talking to somebody who sells these policies.
And chances are, despite the fact that, you mentioned your example and I’ve had the similar experience of your lawyer sending you to a financial advisor, it really wasn’t truly a fiduciary you were sent to. It was a salesperson masquerading as a financial advisor. So if you want to know what somebody really is, you got to look at how they get paid. Do they get paid on commissions? If so, they’re a salesperson. Do they get paid fees for their time like an attorney or an accountant or a fee only financial advisor? Then they’re going to be a heck of a lot more fiduciary to you. So you just got to understand how people are paid and not be naive.
And this is the problem with doctors. We assume because when we call up a GI doctor to get their opinion about what we should do with this patient that’s vomiting blood, that they’re always thinking about what’s best for the patient, we assume that when we call up an insurance agent that they’re operating under the same standard and they just aren’t. That’s not the way the business world works, and it’s a huge eye-opener for doctors when they learn that.

Scott:
So Jim, I feel like I could ask these questions, but I feel like it’d be more fun to just let you rip through this. What are some of the biggest myths, some of the biggest sales points that tick you off the hardest in the sales pitch from these folks, and what’s your rebuttal to them?

Jim:
Okay, well, let’s talk about some of the uses people use to try to get you to buy this stuff. Here’s one of the common ones they throw out there. You need this for estate planning purposes. Okay, well, there are some estate planning uses of whole life insurance. I mentioned one earlier with the irrevocable trust, but most people do not have a complicated estate. They don’t even have to pay estate taxes. You can die today, if you’re married, you can die today with almost $26 million in your estate and pay nothing in federal estate taxes. Pay nothing, right? So let’s say you’re a millionaire now, you got a million bucks and you might die with 8 million. You’re not going to have an estate tax problem. So this guy’s trying to sell you a solution to a problem you don’t even have. And even if you had an estate tax problem, it’s not like the insurance is the only way you can pay for it.
The person who needs whole life insurance for an estate tax problem is somebody that has, they’re worth $40 million and 35 of it is in the family farm. How’s this guy going to pay his estate taxes? He’s not going to have any liquidity when he dies, and he wants to split that farm between two people. Well, now he might have a need for whole life insurance. But Joe Blow doctor or lawyer or engineer who’s going to die and be worth $8 million and most of it’s in liquid assets, this is not a problem. You don’t own any estate taxes, and even if you did, you could pay them out of your liquid assets. So no big deal there.

Scott:
Well, I have a question on that. And I said I was going to rip at it, but I do have a question there. In the article that I read that inspired us to ask you to come on the show here, you say that if you are trying to get a permanent death benefit, for example, in that use case that there are still better products than whole life insurance, such as guaranteed no lapse universal life insurance. Can you explain what that is and if that’s still your stance right now?

Jim:
Sure. The difference between the two, okay. Universal life is this incredibly flexible, permanent life insurance policy, cash value life insurance policy. You can do all kinds of different things with it. So you see variable universal life and you see index universal life and you see straight universal life and you see guaranteed universal life. And what a guaranteed universal life policy is simply a lifelong policy that does not accumulate cash value. And you pay the premium every year, starting whenever, 25 or 35 or whatever until the day you die, and then you get whatever the benefit is. It might be a $1 million benefit. And compared to buying a whole life insurance policy that does accumulate cash value, it might cost about half as much. And so if that’s what you need is a definite amount that’s going to be the same no matter when you die, whether you die now, whether you die in 50 years, if that’s what you need, guaranteed universal life is a cheaper way to get it than whole life.
Now, that whole life policy death benefit, assuming you always reinvest the dividends that it pays out, its death benefit will actually go up over time. And so you might be buying a $1 million death benefit, and by the time you die 50 years later, it might be $2 million, whereas that guaranteed universal life policy is still going to be $1 million. So that’s the difference between the two, but it costs half as much. And so you ought to look at all your options. If you’re going to get married to a permanent life insurance policy, you ought really understand all the options and what you can get.
Okay, another use case that people will sell you on, which I think is one of the dumbest ones, is to pay for college. I mean, most people, most of these policies out there don’t break even for 15 years. That’s just getting back to the total of your premiums paid. And so they’re like, “Oh yeah, buy this and you can borrow against it for college, and it’s great.” Well, it’s not great. You break even after 15 years, that’s when you need the money. It hasn’t grown. You basically had to save up everything for college. Your money didn’t do any of the heavy lifting. You’re far better off buying a rental property and using the income from that to pay for college, or selling in using the proceeds to pay for college, or using a 529 account to pay for college where you actually expect the investment to grow as you go along. Then you are buying a whole life insurance policy to pay for college. So that’s one of my particular pet peeves. I think it’s a terrible use of a whole life policy.
The most common one though is retirement. It’s another retirement account is what they tell you. It’s like a Roth IRA because it does grow in a tax protected way. You don’t pay taxes as it grows, but it’s nowhere near as good as a retirement account. Now, so if you’ve already funded all that stuff, you’ve maxed out your Roth IRA and your spouse’s Roth IRA and your 403(b) and 401(a) and 457(b) at work, and you’ve done everything. And then you go, well, how else can I save for retirement? Let me introduce you to something. You can just invest. You call a taxable account or a brokerage account or you can go buy some rental properties. There’s no limit on how much you can save and invest for the future. There’s only a limit on how much you can put in retirement accounts. So once you max those things out, you don’t have to go, oh, I guess I’ll have to buy a whole life insurance now.
You can go buy some rental properties, you can buy a real estate syndication, you can go buy a total stock market index fund in your Vanguard brokerage account. There’s no limit on how much you can invest in a taxable account. And the truth is because the returns on whole life insurance are so crummy, you are almost always, especially early on, you’re almost always going to be better off, if you are investing, getting a more traditional investment, whether that’s stocks, bonds, real estate, whatever. Most people don’t realize the returns on whole life insurance. You buy this policy, right? You’re buying it as this investment because you’re going to hold onto it the rest of your life, and it will guarantee you returns.
If you hold it for the next 50 years, the returns it guarantees are about 2% a year. That’s what it guarantees you. 2% a year. That’s not even inflation, right? That’s a terrible return for something that ties your money up for 50 years. The projected returns come in at around 5%. And in my experience, most people end up with something between those two. So 3 or 4%. Is that awesome? No. Is it acceptable? I guess if you’re okay with that, holding onto something for 50 years. But if I’m going to make an investment for 50 years, I want to earn a whole lot more than 3 or 4% on it.

Mindy:
You keep saying buy a policy. The way that you’re phrasing it is that this is a one and done purchase, but that’s not true. This is a multiple, you’re paying every month forever for this policy.

Jim:
There’s lots of different ways to buy a policy, and I’m a fan of the ones that allow you to fund it quicker rather than more slowly. You can pay for the rest of your life. That’s a very common way that these policies are sold. But the general rule, if you want to get the best return off the whole life insurance policy, is to fund it as quickly as possible.

Scott:
Can we say least bad return?

Jim:
Least bad might be the better way to say it. But you want to use paid up additions as I mentioned earlier, and you can actually get what’s called a seven pay or a 10 pay policy where you’re done after seven years, you pay big fat premiums for seven years and then you’re done. And you don’t have to pay any more premiums. But that’s not what most policies sold are. Most of them, you’re right, you pay every year. So all you’re doing when you’re buying the policy, yes, you’re making that first payment, but you’re also making a commitment to future payments.
And that’s what drives a lot of people nuts. They’ve had this thing for five or six or seven years, they look at it and they’re like, “Man, I haven’t even broken even on this thing and I don’t have the money I need. I want to go on vacation with my kids. I need to save for their college. I’m not even maxing out my retirement accounts because all my money’s going toward this stupid whole life policy.” And that’s when they get mad, they calculate their return, they realize it’s still negative, and then they come to me going, “Should I dump this policy?”

Scott:
So this is the next question, is what do you do if you’re in that situation?

Jim:
This is hard because the truth is that the worst returns are heavily front loaded. It takes you five years, 10 years, 15 years to break even depending on how the policy is designed. And those are the worst returning years. If you go buy a policy and you turn around, you want to get rid of it a year later, your return might be minus 40%, minus 33%, something like that. That’s what you get back if you dump this thing after a year. Where did that money go? It went to the commission. The agent that sold it to you, that’s where the money went, and he has to be paid whether you dump it in a year or whether you keep it for 50 years. And so the early returns are absolutely terrible, and you got to realize that. But if the long-term returns are 2% to 5%, well, there’s got to be some better returns in there somewhere.
If the bad returns are in the beginning and the good returns come later, and when I say good, less bad is probably the right way to describe it. But what you have to do when you’re deciding whether to dump a policy, even if you never should have bought it, is you have to decide, is the return going forward acceptable? And the way you do that is you get what’s called an in-service illustration or an inforce illustration. And what that does is it projects returns going forward and shows you what the guaranteed returns are going forward from that point. And some people that wish they’d never bought their policy that do this after they’ve had it for 10 or 15 years decide, “Huh, going forward is not too bad. I expect to make 4.5, 5% off this thing.” And they just decide to keep it.
And that’s not uncommon at all, that they keep something they wish they’d never bought in the first place. But a lot of people that are four or five, six, eight years in, they go, “I’ve still got a better use for my money. I’ve still got 8% student loans and I got this stupid whole life insurance policy.” They dump it, they take their cash value and they walk away. Obviously, you should get term life insurance in place first if you actually have a legitimate life insurance need. But I walked away from my whole life insurance policy after seven years and I have zero regrets about it.

Scott:
Okay. I was going to ask, you are incredibly knowledgeable at this. There is a clear determination to know every in and out of this so you can beat down every argument that a salesperson would come through and have this. Sounds like you used to have a policy, I can guess whether you have a policy now or not, but can you walk us through your experience with that?

Jim:
The truth is, I would not be opposed to buying a policy if I had a need for a policy, I would buy a policy. I’m not against it. I’m not particularly easy to insure. I have a few bad habits. I like to go scuba diving, I like to fly, I like to go rock climbing and mountaineering and that sort of stuff. So a policy’s not terribly cost-effective for me because I’d have to pay more for the insurance. But if I needed one, I’d buy one. If I had an estate planning need or a business need or something, I wouldn’t have any problem whatsoever buying a policy. The problem with the one I bought was it was completely inappropriate for me. It was sold completely inappropriately. And that’s the way most policies are sold. They’re sold to someone who doesn’t really have a need for it. The wrong policy is sold, it’s designed to maximize the commission to the agent. It’s not designed to help me or give me the best possible return or anything like that.
So here I am, I’m a medical student, I have no income. No income, I have no assets. And I get sold this little tiny whole life insurance policy by my friend that I trusted who was a summer intern with Northwestern Mutual. And this is a very common scenario for people. And he told me all the great things about it and I said, “Well, I certainly want to be financially responsible and I’m married now, I should have insurance.” And so I bought it. And I calculated my return after seven years on that policy. And part of the reason the return is so terrible is because it was a relatively small policy. Part of it was I didn’t actually buy a policy that was designed to give a good return. It wasn’t a good policy to start with. But anyway, my return after seven years was a cumulative minus 33%. I was still, after seven years, I had not broken even. And I was a long way from breaking even.

Scott:
So for someone who doesn’t understand what minus 33% means in this context, when you stopped paying for the policy, did you just lose everything? Did all the stuff you put into the policy go to zero? Was there some benefit? Were you able to extract some value from the policy in closing it down?

Jim:
I don’t remember what the exact amount was because this was a small policy, but let’s just say for simplicity’s sake that it was $1,000 a year is what I was paying. So let’s say I’ve paid in, now it’s been seven years, and I’ve paid $7,000 in premiums. And what I probably walked away with at that point would’ve been something like 4,500, $5,000. So there’s something there. You don’t walk away with nothing, but you’ve still lost money. It’s not like it’s been a good investment. Seven years, you tied your money up and you have a negative return on it. That’s hard to get excited about it as an investment.

Scott:
And is this cashed out at that time? When you close down the policy, is there a taxable event?

Jim:
Yeah. You’re surrendering the policy and that’s a taxable event. In my case, I had a loss, so there’s no taxes due. The basis for that cash value is the total amount of premiums paid. And so I had a loss, so I didn’t know any taxes. If you’ve had it for a long time, you may have a little bit of a gain that you have to pay ordinary income tax on. But the truth is, if you’ve had it long enough to have a gain, you may want to keep it, not to avoid paying taxes on the gain, but just because you’ve gotten past the crappy return years. Now, that takes a while. Some policies, you might be 15 years into it before you’ve actually broken even.

Scott:
Have you noticed that, in the concept of trying to break up with your whole life insurance policy, I imagine that this also in many cases comes with a breakup with the financial planner who sold it to you and may manage much of your assets. Have you come across that scenario?

Jim:
Yeah, I mean, that’s a lot harder situation, right? Because not only do you have to fire the advisor and you get rid of the policy, but you got to deal with the fact that you’ve trusted somebody and then they sold you something that maybe wasn’t very good for you. And that’s painful, number one. Number two, it’s hard because you maybe don’t feel competent to do it on your own yet. So anytime you fire a financial advisor, you should first get the plan in place of what you’re going to do after you fire them. And if that’s using another advisor, go get that advisor first. Have them help with the process, and they can. They just pull money away from the other advisor. It’s no big deal. They send them a form, they send them the money, sign a paper saying, “I’m done paying you,” if you’re paying a regular fee to them.
And then you can deal with the insurance company directly as far as dropping that policy or cashing out that policy or whatever you choose to do with it. If you’re going to do it yourself, you need to get a written financial plan in place. If you’re going to be a do-it-yourself investor, you ought to be able to write this plan yourself. If you’re not going to be a do-it-yourself investor, well, go hire good advice at a fair price, and then let that person help you. But yeah, it’s definitely more complicated if you thought this person was a real financial advisor.

Scott:
Yeah, I think that has been the case. I had a conversation with someone recently who unfortunately was in that situation where I think their eyes were open to the incredibly expensive life insurance policy that had been sold to them by their financial advisor, plus millions of dollars, couple million in assets under management with that financial advisor. And the conversation was, I think you should go and hire a fee-only financial advisor, perhaps using a platform like XY Planning Network. We have no affiliation, but like those guys. Pay them a fee, which could be thousands of dollars to put together that plan, and then figure out the transition plan. And that’s a very painful, scary, anxiety-producing exercise there.

Jim:
Absolutely, but extremely empowering once you get to the far side of it. And what you need to realize, if the listener is out there thinking, “Ah, that’s the situation I’m in, crap. I got to do this now,” let me promise you, there is light at the end of the tunnel. Almost everybody goes through this process at some point. And so don’t feel like you’re alone. We’ve all done it. I’ve done it. I’ve done it at least twice before I really became financially literate. Almost every White Coat Investor has done this. They trusted somebody maybe they shouldn’t have trusted, they bought something maybe they shouldn’t have bought. And you’ve got to transition out of that. Otherwise, if you don’t, I mean, think about the consequences if you don’t. It’s going to be terrible if you’re still there in 10 years.

Scott:
Yeah. I mean, it’s really unfortunate here. How you think these people feel, Jim, when they become aware of the terrible investment that whole life insurance is and maybe the other problems with their financial advisor that are contributing to these large expenses or big loss?

Jim:
I mean, you’re going to feel like I felt. You’re going to feel like a schmuck, right? And there’s no way around it. And this happens all the time with my audience. Neurosurgeons, interventional radiologists. These are not dumb people. They’re very smart people, but they maybe didn’t have the best understanding of how financial products work. And they interacted with an industry which is designed to take advantage of them, that views them as whales to be harpooned. So don’t feel like it’s 100% your fault. It absolutely is not. Nobody learns this stuff in high school and college. You have to learn it on your own. And even very smart people make these mistakes. So don’t feel like you’re a hopeless case or beat yourself up too much. Beat yourself up just enough to fix the problem.

Mindy:
Yeah, I want to highlight that you’re working, I don’t even know what an interventional radiologist is. I follow several doctors on Twitter and I’m like, I don’t know that term. Don’t know that term. Don’t know that term. But doctors are intelligent. You specifically, you’re in emergency medicine. You don’t just specialize in one thing. You kind of have to know a lot about everything and then call in the experts. And that’s what you do with your finances too. Maybe you don’t have the time to manage your finances by yourself. So you call in an expert and they talk a really good game. They’re salespeople for a reason. They’re making $30,000 on one life insurance policy for a reason because it’s a lucrative thing for the insurance company.
So when you, I don’t want to say get sucked in, but that’s a really great phrase. So I am going to say it. When you get sucked into their sales pitch, don’t beat yourself up. But also don’t sit there and say, “Well, I guess I’m stuck with this now.” You’re not stuck with it. You’re not stuck with the financial advisor, you’re not stuck with the crappy policy. You have to make a change. So empower yourself. Understand that even smart people like doctors and attorneys and even smart people get sucked in by a really great sales pitch. I’ve been sucked in by great sales pitches. You cut your losses and move on, and what is that sunk cost fallacy? You have already lost this money. Don’t continue to lose more. You have already paid these premiums. Don’t continue to pay more. If your financial advisor isn’t performing, you have already lost out on gains that you cannot get back, don’t continue to lose out going forward. The XY Planning Network is a great place to find a fee-only financial advisor.
What’s a fee-based financial advisor? You mentioned that at the very beginning of the show. I didn’t even know there was a fee-based. I thought it was either the commission-based or fee-only. That’s another fun thing, so make sure you’re getting a fee-only financial advisor, but they aren’t that expensive. Scott said something about thousands of dollars. I think Kyle Mast, when we first interviewed him, it was like five years ago, but when we first interviewed him, he was something like 6, $800, $1,000 to review your financial situation and your goals and give you an idea of what you should be doing. In the terms of financial independence, that’s like a drop in the bucket.

Scott:
Mindy, I’m more commenting on that in the context of perhaps a transition of this sort might involve a lot more work to break up with a existing financial advisor, move large amounts of assets that are in or out of retirement accounts to a new plan, make sure that there’s no tax event when that happens, make sure that that’s done correctly. That may be a few thousand dollars, but if you have $2 million in assets under management with your financial planner and a $50,000 a year policy, that person’s already made 40 grand off you by selling you the policy to get things started, and they make another probably 2%, which is 50 grand a year on 2 million in assets every year for managing. That would be an example. Everything will vary, so it’s way cheaper to hire, even if it’s cost you…

Mindy:
Always way cheaper.

Scott:
… five or 10 grand in that first year to get really good advice to get that set up.

Jim:
And for sure, that is the going rate on financial advice. If you want high quality fee-only financial advice, you should expect to pay a four figure amount per year. Something between $1,000 and $10,000. That’s the going rate. Now, if you are paying AUM fees, you’re paying 1% of assets under management and you got $3 million, that’s $30,000 a year every year. That’s way more than the going rate. So as your assets climb, you’ve got to negotiate that AUM fee down or go to somebody that charges hourly or a flat fee.

Scott:
Great. Well, Jim, do you have anything else to add today on the discussion around life insurance here before we get out of here?

Jim:
Oh, I would just caution people to learn about this stuff, have a natural bias against whole life insurance. Know that most of the time it’s not right for you, but that there are situations where it may make sense and it’s okay to look if you’re in one of those situations and understand it, but just recognize that you don’t need it just because you make a lot of money or just because you’re married or something like that. That’s not a reason that everyone should have a whole life insurance policy.
There’s way too much information out there on the internet that seems to treat it equal to term life insurance. It’s not equal. 99% plus of the policies out there that should be sold are term life insurance policies. The truth is about 80% of whole life insurance policies get surrendered before death, and this is something that’s designed to be held for your whole life. So 80% of people are regretting it. When I’ve polled my own audience of people who have bought these policies, 75% regret buying it. So keep in mind if you do buy this, there’s a very good chance you’re going to regret it.

Mindy:
Wow. 80% of people who buy this policy are unhappy and don’t continue all the way through. That right there is a pretty damning statistic.

Jim:
Yeah, I mean, that’s not my statistic. It comes from the Society of Actuaries.

Scott:
One last thing before we go, I know I already said that. Could you explain what fee-based versus fee-only means in this context?

Jim:
Fee-based is a term that’s used by the industry to confuse you. Seriously. That’s what it’s for. And it used to be everybody was paid under commissions, and then there was this trend to pay for advice like you do to an attorney or an accountant, to pay fees instead of paying commissions. And so those people started calling themselves fee-only. Well, then people are like, well, why can’t I charge a fee and charge commissions? Maybe I can sell loaded mutual funds, sell whole life insurance and charge them an annual fee, and they had to come up with a name for that, and the name is fee-based. And it gets confused all the time with fee-only. It just means commissions and fees.

Scott:
Being a fee-based financial advisor sounds like a great way to achieve financial freedom at an early age.

Mindy:
For the financial advisor.

Jim:
You can give good advice and make a killing as a financial advisor. You don’t have to do it wrong. It’s a very lucrative profession. You can do it right, charge fair fees, and still do very, very well.

Scott:
That was more of a joke. Yes. But yeah, I’m sure we’ll get beat up by some wonderful fee-based financial planners out there who are doing a great job, but we appreciate it, Jim. This has been fantastic. You are clearly… I can’t imagine talking to somebody more knowledgeable about this topic than you, so I really appreciate it. We will link to the why whole life insurance is a bad investment article that inspired this particular podcast, but where can people find out more about you?

Jim:
Well, the brand is The White Coat Investor, and so if you want to listen to my podcast, it’s The White Coat Investor. You want to read my books? They’re all have White Coat Investor in their name. The website, it’s all centered at thewhitecoatinvestor.com.

Scott:
Awesome. Well, thank you so much. We really appreciate it. This was absolutely fantastic.

Mindy:
Thank you Jim, and we will talk to you soon.

Scott:
Was wonderful to be with you today.

Mindy:
All right, that was Jim Dahle from The White Coat Investor. That was a lot of fun, Scott. I always learn new things whenever we talked to people on this show. We had Joe Saul-Sehy on episode 139 who talked about just life insurance in general. I thought it was a really great episode where he talked about the facts of life insurance, but this episode really dived into why whole life is probably not a good idea for you.

Scott:
Oh, I mean, this guy was fantastic. White Coat Investor is a phenomenal platform and resource for not just doctors, but a lot of other folks that can be helped out with here. And you can tell that Jim has a little bit of a vendetta against the life insurance industry, and as a result of that is perhaps one of the most knowledgeable people in the world on the subject that is not incentivized to sell it in any way, shape or form. So what a privilege to speak with him.
I mean, it’s just an incredible detailed breakdown of all of the arguments for life insurance that he’s able to kind of dissuade, while saying, yes, there are a few limited use cases, and one of those few use cases could be for a fairly wealthy real estate investor who wants to build up a several million balance in their cash balance, in their life insurance policy, that they can borrow against very easily for certain projects. So really think through that very, very carefully if that’s actually you. But that is going to be one of the few use cases that are going to be relevant outside of a couple other ones that he touched on that may occur to a tiny, tiny percentage of BP Money listeners.

Mindy:
Yep, absolutely. So life insurance in general. If you are financially independent, you probably don’t need, you might need, but you probably don’t. I don’t have life insurance. Scott, do you have life insurance?

Scott:
I don’t have a whole life insurance policy. I do also do not have currently a term life insurance policy, although I may revisit that in the future and get some sort of balance there.

Mindy:
I have an umbrella policy. I have lots of different types of insurance. I don’t have whole life insurance. I don’t have term life insurance, simply because we are financially independent, so we’re self-insured.

Scott:
Exactly.

Mindy:
Should something happen to us, our children will still be taken care of.

Scott:
The philosophy here that I subscribe to for life insurance specifically is to say, it is to protect the lifestyle of my dependence or my heirs upon my passing. And so if financial freedom for me and my family means $1.5 million in net worth and I’ve got 500,000 in net worth, I’m going to insure for the million dollar spread between those two numbers, likely with a decreasing term insurance policy. So that when in five, 10 years my net worth is a million and my goal is a million and a half, now I only need 500,000 in insurance and so on and so forth. That is an art to that. There’s a guess, but a decreasing term policy is something that really would appeal to me if I were shopping for life insurance, if I was starting all over again and had dependence, of course. I never had that because I never had dependence until the last couple years.

Mindy:
Yeah, I think life insurance has its place, but it isn’t always necessary. So look at your situation, look at your circumstances, look at your finances and decide, do I need it? How much do I need? Don’t let somebody talk you into something. Do your research and get the right policy for you, if that even means having a policy at all.

Scott:
So look, if you have a friend or a family member who’s considering whole life insurance, please have them listen to this episode first or go check out The White Coat Investor’s article again, which we’ll link to in the show notes here, why whole life insurance is a bad investment, debunking the myths over at thewhitecoatinvestor.com. Go read that article or have them listen to this episode before they buy whole life insurance from somebody who’s going to make a 80 to 100% commission on the first year’s premiums.

Mindy:
All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying so long for now.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.