The dark side of whole life insurance

Subscriber, new client, and all-around great guy Thomas, sends in a question to Yours Gluteny:

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David,

I’ve talked to a couple of people about whole life who’ve had it in the past, and they said that they had eventually dropped it because after a certain point, their premiums rose to a level they couldn’t afford. My policy illustration shows it never changing. Do you have an idea of what they’re referring to?

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This is a great question.

Most whole life policies on the market today are level premium whole life.

However, there are advisors selling hybrids and other “lookalike” policies.

If you read or hear about people having problems with rising insurance premiums, here’s why that happens:

1) They do not have guaranteed level premiums. A policy illustration (and the insurance contract itself) will tell you flat-out whether or not you have guaranteed level premiums. If it doesn’t say so, assume your premiums may rise.

In my business, I ALWAYS use guaranteed level premium contracts because it’s simpler, there’s less risk of people having to drop their policy later, and I haven’t found a disadvantage to that approach.

2) The policy is a variable whole life policy as opposed to a fixed (guaranteed) contract. This means cash values are invested in the stock market, which WILL affect premiums.

3) The policy is a graded premium whole life (which is a type of policy where premiums start low and eventually rise, sometimes substantially–it’s usually sold as a low-cost way to “dip your toe into” the product).

4) The policy is a blended whole life (a blend of term and whole life, where the term premium continues to rise each year and eventually becomes prohibitively expensive if kept).

I sometimes use blended whole life… but mostly when someone wants to put a large lump sum of money in in the first couple of years of the policy. We then pay off the term pronto to avoid the ongoing costs. The underlying reasons why we do it this way gets a bit technical but basically it allows the policy to keep its tax-advantaged status and gives the client some flexibility as to how premiums are paid using lump sum amounts.

If you don’t pay off the term insurance, what happens is… those premiums keep rising, causing your whole life premiums to rise. Blended whole life is sometimes sold as a cheap way to purchase whole life… but agents often neglect to tell the client they need to keep converting the term to whole life to keep the premiums from getting out of control.

5) Sometimes agents try to do weird funding options where they assume from the outset that dividends will permanently reduce the premium payments (which makes it look more affordable). If dividends are insufficient to cover premiums, premiums appear to rise (when in reality they were initially higher than what the client could have afforded).

6) Another possibility is the client is confused about what they actually own, either because they mixed it up in their mind or the agent lied to them or misrepresented it. For example… Universal life LOOKS like whole life, but is a combination of non-level term insurance and a cash value account… on paper, it looks like a more sophisticated version of whole life…

… but it has variable premiums that almost always rise over time unless you do a lot of maintenance to keep the internal costs in check. I had to fix a LOT of these when I worked for MetLife (back in 2005) and a lot of people thought they had whole life because the agent told them they had “universal whole life insurance”.

Argh!

No no no no no!

That’s “the dark side” of the life insurance industry… the financial advisors, investment advisors, and life insurance agents who… quite frankly… don’t know what the fugk they’re doing.

I hate to hear about cases where people have a bad experience with a financial product that SHOULD make their life simpler… not more complicated.

It’s one reason I stick to the basics (and suggest my clients do too) when designing thse things. It’s also why I don’t think it pays to DIY or cut corners when putting together a comprehensive insurance and savings plan.

Now, some of my subscribers will undoubtedly take this to heart. They don’t want to be scrwed over.

But, sadly, many will not heed my advice

¯\_(ツ)_/¯

Simple is boring.

It’s not secksy.

It’s not what [insert guru who complicates the crap out of financial planning] says you should be doing.

For those people, I bid thee farewell. Good luck to you.

As for me?

No thank you. No thank you. No thank you.

If you happen to think like me, come join my merry band.

More info about my custom life insurance services here:

https://www.monegenix.com/

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About David

David Lewis is a licensed life insurance agent, and has worked in the life insurance industry since 2004. During that time, he has worked with some of the oldest and most respected mutual life insurance companies in the U.S. To learn more about him and his business, go here.