Financial advisor is pushing whole life as an investment vehicle, need advice

[Fausto]

First off, this guy has been great in terms of getting our term and disability stuff set up as well as doing the groundwork to get our financial ducks in a row. Please spare me any rants about these guys being charlatans and whatnot; I'm sure some of them are, but my experience thus far has been positive.

That said, most of our meetings lately end with him trying to push a cash value policy on us as a "no-risk investment vehicle!". My wife seems to be buying into this, my gut says this is a sub-par investment idea, but my specific knowledge here is very limited.

Tell me why this is (or is not) stupid and what I should be doing instead.

Cliffs on us: two young kids, late 30s, both professionals.

Edit- more info

*We both have the equivalent of a 401(k). I'm not currently maxing mine out but I'm contributing the equivalent of 12% taking into account my agency's matching funds.

*Wife has a Roth but she's maxed out the contributions for it.

*529 already set up for each kid.

 

[rsd]

Funny enough my wife and I are in the same boat.

We contribute to our 401ks up to match, had been previously doing RothIRA contributions to max before we got married but will not qualify this year and moving forward. So for us our debate is whether we up our 401k, invest in this whole life policy, or a blend of the two.

Fausto do you guys also have 401ks? Do you max it? Do you qualify for Roth? Do you guys have other insurance through work or other (term?). I imagine you guys should be asking the same questions as us. I'm not sure what the best answer is though.

To me though whole life is a much more conservative investment vehicle but it also has its pros related to the death benefit and the fact that the growth is tax free. My 401k/Roth has sucked in the last 10 years frankly so I'm a bit torn.

 

[DaveSimmons]

Have you already maxed out 401k, Roth IRA, and kid's college savings options?

I'd have to do the same Googling you would to show the evidence of why it's a terrible idea, but I imagine there are heavy fees and low returns compared to a Vanguard.com Target <year> index fund.

That is a fund made up of only low-expense index funds, US total stock market and foreign stocks, plus an amount of bonds that increases over time as you near retirement.

I've never read anything credible arguing for insurance-based investment. IMHO, insurance should only be purchased for the death / disability benefits to protect your family.

Also, tax sheltering by itself is only good if the returns are high enough. It's better to earn $1,000 and pay $150 in taxes then to earn $100 tax free.

 

[Vic Vega]

It's a scam. Don't do it.

Ignoring the terrible returns they provide, most all of them have completely shady payout policies. So the payout upon death is 150k but you've built the value up to 500k. You die. They pay 150k and keep your remaining $350k.

Don't do it. It's a scam.

There are life insurance sales guys on this forum. They will be here shortly to defend the scam. You won't have to wait long.

 

[OutHouse]

whole life? dude how old are you? if you over 30 do not do it.

i got a whole life with MET Life on me and my wife in 1991 and it "should" be paid up this month. we were young and it was cheap $80 bucks for both. if i got a whole life now it would be over 150 a month just for one policy.

 

[The-Noid]

It's a scam. Don't do it.

Ignoring the terrible returns they provide, most all of them have completely shady payout policies. So the payout upon death is 150k but you've built the value up to 500k. You die. They pay 150k and keep your remaining $350k.

Don't do it. It's a scam.

There are life insurance sales guys on this forum. They will be here shortly to defend the scam. You won't have to wait long.

Contracts endow for the cash value or the face amount. Not exactly sure where you came up with this. Are we in 1970 again?

 

[rsd]

Contracts endow for the cash value or the face amount. Not exactly sure where you came up with this. Are we in 1970 again?

Yeah I'm not sure what Vic Vega is talking about from what I understand.

 

[Blackjack200]

OP, I spent 6 months in training to sell whole life cash value policies. I studied the product from as many angles as I possibly could, talked to people who had them and believed in them. At the end of the day, I could not bring myself to sell them because I just did not believe they were the right solution for most people.

That being said, there are some unique advantages, most of which come into play if you are very wealthy. Here they are.

1. When you die, the proceeds pass to the beneficiaries free of estate tax
2. The policy would not be considered part of your assets if you were to get sued.
3. They get favorable tax treatment, so if you have maxed out all other tax shelters (401(k) IRA, 529 etc.) it may be an option.
4. They are typically pretty safe (although only as safe as the underwriting institution, so if Guardian or MetLife goes belly up, your policy is toilet paper.)

For me, it didn't seem like those advantages offset the huge expenses and low returns of the policies, but you may decide differently.

Ignoring the terrible returns they provide, most all of them have completely shady payout policies. So the payout upon death is 150k but you've built the value up to 500k. You die. They pay 150k and keep your remaining $350k.

That is completely false.

 

[Fausto]

whole life? dude how old are you? if you over 30 do not do it.

i got a whole life with MET Life on me and my wife in 1991 and it "should" be paid up this month. we were young and it was cheap $80 bucks for both. if i got a whole life now it would be over 150 a month just for one policy.

Yeah, over 30. We both have more than adequate term and disability policies in place.

...and while we are well-off compared to many, I am not remotely worried about estate taxes.

 

[highland145]

He makes $$ off your purchase. Why else push it?
Get a new adviser.

 

[OutHouse]

He makes $$ off your purchase. Why else push it?
Get a new adviser.

yup thats pretty much the bottom line. your adviser may be a nice guy but he is still a salesman with numbers he has to meet. whole life policies are a pretty high commission so they do push them.

 

[The-Noid]

yup thats pretty much the bottom line. your adviser may be a nice guy but he is still a salesman with numbers he has to meet.

Whole life payouts to the advisor are around $50-60 per $1,000 face depending on the company. Pure risk insurance, i.e. term pays almost nothing $3/$1,000 and a bit on the renewals.

Additional premiums will pay somewhere in the neighborhood of $14-$20 / $1,000.

Also I believe in every series 7 book there is a little portion that states "Whole Life / Variable UL / etc, should never be recommended as an investment vehicle, they are to be considered insurance vehicles."

Tell him you want one of the policies taken out in the 80's or 90's that have guaranteed interest floors of 4.5 or 5.0&#37;/year and no penalties for withdrawing the money. Given that rates are marginally positive those policies still have some benefits.

 

[DaveSimmons]

If you're too risk-averse for even total market index funds, what about i-bills? The return is lousy right now but still probably better than the Whole Life "investment."

 

[chusteczka]

OP, I spent 6 months in training to sell whole life cash value policies. I studied the product from as many angles as I possibly could, talked to people who had them and believed in them. At the end of the day, I could not bring myself to sell them because I just did not believe they were the right solution for most people.

That being said, there are some unique advantages, most of which come into play if you are very wealthy. Here they are.

1. When you die, the proceeds pass to the beneficiaries free of estate tax
2. The policy would not be considered part of your assets if you were to get sued.
3. They get favorable tax treatment, so if you have maxed out all other tax shelters (401(k) IRA, 529 etc.) it may be an option.
4. They are typically pretty safe (although only as safe as the underwriting institution, so if Guardian or MetLife goes belly up, your policy is toilet paper.)

For me, it didn't seem like those advantages offset the huge expenses and low returns of the policies, but you may decide differently.

These unique advantages seem more appropriate for a business owner providing a product or service and accordingly liable. A doctor, lawyer, architect, supermarket owner, and computer services provider (for example) could all benefit from such a policy assuming their personal wealth maxed out other possible investment vehicles.

Isn't there a law stating that up to $2 million may pass to an estate's beneficiaries after death without being taxed? With this in mind, a whole life policy would be useful for someone who has amassed more than this untaxed amount.

Otherwise, this policy does not seem appropriate for an employed knowledge worker.

 

[momeNt]

This doesn't sound like a financial advisor speaking to you, sounds like a salesperson.

 

[Elbryn]

First off, this guy has been great in terms of getting our term and disability stuff set up as well as doing the groundwork to get our financial ducks in a row. Please spare me any rants about these guys being charlatans and whatnot; I'm sure some of them are, but my experience thus far has been positive.

That said, most of our meetings lately end with him trying to push a cash value policy on us as a "no-risk investment vehicle!". My wife seems to be buying into this, my gut says this is a sub-par investment idea, but my specific knowledge here is very limited.

Tell me why this is (or is not) stupid and what I should be doing instead.

Cliffs on us: two young kids, late 30s, both professionals.

Edit- more info

*We both have the equivalent of a 401(k). I'm not currently maxing mine out but I'm contributing the equivalent of 12% taking into account my agency's matching funds.

*Wife has a Roth but she's maxed out the contributions for it.

*529 already set up for each kid.

what are the penalties for early withdrawal? what if you want to make changes? how flexible is it? my guess is probably not very.

wife has roth, do you? that's 5k a year. index market funds generally do not generate much of a year to year tax hit for an option in the taxable side. i-bonds are nice too up to 10k a year for inflation based returns.

you mentioned agency as a job, is that state? fed? do you have the option for a 457? that's a very nice vehicle where withdraws are not subject to the 10% penalty. great if you plan on early retirement to bridge the gap until you can safely withdraw from 401k/iras.

 

[Fausto]

what are the penalties for early withdrawal? what if you want to make changes? how flexible is it? my guess is probably not very.

wife has roth, do you? that's 5k a year. index market funds generally do not generate much of a year to year tax hit for an option in the taxable side. i-bonds are nice too up to 10k a year for inflation based returns.

you mentioned agency as a job, is that state? fed? do you have the option for a 457? that's a very nice vehicle where withdraws are not subject to the 10&#37; penalty. great if you plan on early retirement to bridge the gap until you can safely withdraw from 401k/iras.

I'm in the FERS system. Cliffs on the 457? Or are they the same thing?

 

[Elbryn]

different. one is a pension system the other a 401k type account for government employees. check your hr site for supplemental retirement options.

otherwise can be considered just like a 401k only without that early withdraw bonus. used to be a 457b wise website that you can look at rules but there's wiki's and such out there too.

403b's are in teh same class but for educational. some state universities have access to both and you can put in to the pension system, a 403b and 457b. each 403/457 has a max of 16.5k you can salt away totaling a max of 33k a year should you max.

 

[sactoking]

Op, ygpm

 

[Hugo Drax]

Scam, do not get suckered into this. What you need to hire is a licensed fee only based Registered Investment Advisor.

http://en.wikipedia.org/wiki/Fee-only_financial_advisor#Fee-only


Fee-only
As defined by the review materials for the Certified Financial Planner exam and the National Association of Personal Financial Advisors, fee-only financial advisors, such as an investment advisor, are compensated solely by the client, typically achieved through a combination of hourly fees (including retainers), financial planning fees, and asset management fees. Neither advisors nor affiliates may receive commissions, rebates, awards, finder&#8217;s fees, bonuses or other forms of compensation from others as a result of a client&#8217;s implementation of the individual&#8217;s planning recommendations.[2] The fee-only model of compensation reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.
A clear distinction should be made between brokers, who often refer to themselves as "fee-based" (receiving both fees and commissions) and "fee-only" (someone who never receives compensation or incentives from a third party.)

A fee-only advisor may reduce conflicts of interest such as:

• advising a client to buy products and make investments when holding cash and other liquid assets may have been a more suitable recommendation at that time.
• an incentive to generate commissions through the unnecessary buying and/or selling of securities (also known as churning).
• an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a commission.
• an incentive to make recommendations that pay higher sales commissions to the advisor when a less expensive alternative may have been available.

 

[kami333]

For most people, most of the time whole life doesn't make sense but there are cases where it can.

Here's a pretty good thread on it:
http://www.fatwallet.com/forums/finance/1010849/

 

[JS80]

Whole life is best for the wealthy as a tax shelter. I don't think it's right for you.

 

[mshan]

I believe the basic argument is that you are overpaying for what will, over the long-term, be a very sub-par investment.

You may get short-term comfort that you are not "losing" money when markets get tough, but that false sense of security can get very costly over very extended periods of time:

John Bogle & the tyranny of compound interest:

http://books.google.com/books?id=acSxsst51psC&pg=PA421&lpg=PA421&dq=tyranny+of+compound+interest&source=bl&ots=KjnEJBkmOz&sig=8gaYAC06f_8EZCiq0NDQLQnAj2o&hl=en&ei=pk_hTpuqF8XW0QHuh4CnBw&sa=X&oi=book_result&ct=result&resnum=3&ved=0CCkQ6AEwAg#v=onepage&q=tyranny%20of%20compound%20interest&f=false

http://www.pbs.org/wgbh/pages/frontline/retirement/etc/tyranny.html

Unlike the skills required to thoroughly analyze individual stocks as good investments or not, mastering the fundamentals of personal finance and how to invest wisely in a properly diversified portfolio of mutual funds is very easy to comprehend and master, and then you and your wife might find that you can tolerate a lot more "risk" than you originally thought (if you choose a properly diversified portfolio of good mutual funds for the long-term, you are not talking about permanent loss of capital, you are really talking about stomaching market volatility / short-term price fluctuation, or in worst case, under performing market as a whole - most likely this still means making money, just not as much as you could have)


As a starting point, I always recommend the following initial reading:
http://selectedfunds.com/downloads/SFSuccInv1210.pdf
http://www.amazon.com/Personal-Finan...3388901&amp;sr=8-1
http://www.amazon.com/Mutual-Funds-D...3388929&amp;sr=1-1
http://www.amazon.com/Common-Sense-M...3388957&amp;sr=1-1


To help filter out short-term stock market noise, perhaps heed the words of Warren Buffett and John Bogle:
- Warren Buffett always says over the short-term, the stock market is a voting machine, but over the long-term, it is a weighing machine (do you have faith that American capitalism can ultimately repair and reinvent itself, and manifest this as increasing earnings growth over the decades to come?)
- John Bogle was asked on CNBC whether he said buy and hold is dead, and he said "it depends upon what you buy".

Good Luck!

 

[nickbits]

Ask them how much commission they get for a whole life policy. Insurance is not an investment. Insurance is insurance.

/suzeorman

 

[ponyo]

Whole life is best for the wealthy as a tax shelter. I don't think it's right for you.

this. If you qualify for Roth, whole life is not for you.