Whole life insurance is often pitched as a chasunah or retirement plan. What are your thoughts on using WLI as an investment?
The essence of financial planning is understanding a specific client’s goals and ability to take risks. Some want to retire comfortably or leave a sizable yerushah. Some want to help their kids buy houses; others are just saving to pay for their kids’ weddings. Some are okay with volatility in their investments; others prefer investments that grow slowly but safely. Even for those who are seeking “safer” investments, insurance company products very rarely have a place in a frum family’s portfolio. Let’s break down why that is so.
First of all, it’s crucial to distinguish between term life insurance and other types. Term life insurance is simple, cheap and very flexible. Most families would be best served by a simple term policy for each parent. Similar to your auto insurance, you pay a small premium in exchange for coverage for a defined term, in case of a loss. It’s important to stress that the negative attention life insurance gets is exclusively related to the permanent products, not term life insurance.
Permanent insurance is a whole different story. These products are dramatically oversold in the frum world, particularly in heimish circles. Permanent insurance products come in many different shapes and sizes, but they are very rarely an ideal investment vehicle for a frum family. Whole life insurance is the most common type, and that’s why many (incorrectly) refer to all permanent insurance products as WLI. While they typically combine life insurance with an investment component, there are many issues that come up.
The first is that you are obligating yourself to make ongoing payments for many years, often your whole life. I see many couples buy these policies when they are young and have few expenses. A few years down the line, their expenses have grown and they can no longer afford the policy. As these policies are front-loaded with fees and commissions, if you cancel it in the early years, you typically take a massive loss. Forget about growth, many policies don’t even break even until seven to ten years in. Often there are surrender fees as well. As a matter of fact, the Society of Actuaries has found that about 80 percent of whole life policies are surrendered prior to death. Clearly, many buy these policies without fully understanding them and later regret it.
Take a look at Michael and Rivky, a young couple with one toddler. Their rent is $1,800 monthly, and other expenses are minimal. Between Rivky’s job, some parental help, and Michael’s kollel check, they can put away $3,000 a month. Many couples in their position start WLI policies, with monthly premiums in the thousands, thinking they will always be able to afford them.
Fast-forward five years and a couple more kids. Even though Michael took a job, their budget is much tighter. Their $1,800 rent has turned into a $4,500 mortgage, plus other home ownership costs. The Camry became an Odyssey. There’s tuition, health insurance, taxes, plus a much bigger grocery bill. All too often, they up canceling the policy and losing a significant chunk of what they put in.
Even if someone does retain a WLI product for his whole life, the returns are meager, especially after you factor in inflation. It’s also important for customers to be aware that agents can net huge commissions on WLI, and to make sure their agent’s recommendations are in their best interests. They can make sense in certain niche cases, such as for the extreme wealthy who want to avoid estate taxes. Other examples include providing liquidity in an illiquid estate, or certain business partnerships. But the typical middle-class family is significantly hampering their future by buying these polices. I’ve also seen situations where families had to delay buying a house because their WLI payments were so high.
Take Aryeh and Mindy, a middle-class couple in their thirties. They already have enough coverage via term life insurance. They make a nice living and can easily afford the $2,500 monthly WLI payment Aryeh’s friend wants to sell them. He says, “All the wealthy have WLI. It grows safely and it’s tax efficient. Some of it is guaranteed. You can even borrow against it. It will provide coverage for your entire life. It’s really a no-brainer for someone like you.” Some of this may be true, but is WLI really the best option for them?
Let’s see. There’s no such thing as a free lunch. If the insurance company is providing a benefit, Aryeh and Mindy are paying for it. They already have enough term coverage in case of a premature death. There are likely much better places for them to put their money. Paying down any student loans, auto loans or their mortgage might provide a better return than WLI. Contributing to a 401(k) or IRA may also be a better option. In many cases, a 529 college savings account can be used for tuition and should be considered. Even if none of the above make sense, they still shouldn’t buy the WLI. Insurance companies aren’t better investors than Aryeh and Mindy. They can invest on their own, in a very conservative portfolio, without the additional layer of fees. They’ll have the same peace of mind, and they’ll likely be much better off financially. Additionally, they’ll have much more flexibility in case their goals or risk tolerance changes. It’s very easy to set up an auto transfer into an investment account, and there are organizations that can assist with this.
Additionally, many people feel, “If I can make 5 percent with very little risk, should I be taking stock market risk to earn 10 percent? I’m okay making half.” But 5 percent is not half of 10 percent, it’s not even close. Investing $2,000 a month for 40 years at 5 percent will turn into $2.8 million. But the same $2,000 invested at 10 percent for 40 years will turn into over $10 million.
While insurance companies do offer other products that have potential to earn better returns than WLI, the devil is in the details. I’ve seen many policies that allow the insurance company to change caps, crediting rates, costs, etc., after you’ve purchased the policy. I’d never lock away my money with an “opponent” who can change the rules in the middle of the game.
So yes, there certainly are situations where permanent insurance is appropriate. That being said, especially when dealing with lower to middle-class families, those situations are exceedingly rare.
(Originally featured in Mishpacha, Issue 988)
