Whole life Insurance Explained | Investment or Scam?

Since the end of World War 2, whole life insurance was the most popular insurance product out there. Families using whole life insurance policies found financial stability and sufficient retirement funding when losing their loved ones. People even used whole life insurance as an investment method at that time since it would secure annual dividends.

Nonetheless, in 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) passed in the US was the biggest tax increase in U.S. history. This made people turn their attention to the stock market which accounted for inflation on an annual basis. For instance, the S&P 500 was adjusted for inflation with an amount of 14.76% in 1982 and 17.27% in 1983. Unlike the insurance companies which provided rather fluctuating interest rates that did not account for inflation.

Today, 59% of people living in the US pay for life insurance. It is seen as a contemporary investment tool that is protected from the potential collapse of the stock market. We will be discussing this a bit more later in this video and will run the numbers to measure the effectiveness of using whole life insurance as an investment tool.

Whole life insurance provides the insured party with some peace of mind when it comes to the continuity of their families' financial stability and overall well-being in exchange for level, regularly paid premium payments.
It spans over the entire lifetime of the insured party and does not have an expiry date.

Whole life insurance is made of three components. These are premiums, death benefit, and cash value. So premiums are what you pay every month for whole life insurance. This is amount is flat and it does not change throughout the lifetime of the insured party in exchange for what is known as the death benefit. The death benefit is received by the insurance beneficiaries which are typically the family members of the insured party. Yes, it's called death benefit because the policy beneficiaries receive this amount when you are dead. For instance, this can amount to $500,000, or some people even opt-in for bigger amounts based on their financial capabilities.

When premiums paid into your whole life policy matches the death benefit, it is considered to have reached its maturity date. Typically, insurance companies design policies to mature when you turn 100, but some recent policies even extend the maturity date to age 120.

The third component is the cash value which is sometimes referred to as a living benefit. Part of the premiums you pay goes to building up the cash value which you receive dividends on. This is what makes whole life insurance different from other types of life insurance such as the term life. During the first 10 to 20 years of coverage, a whole life insurance policy's cash value is quite small, due to fees and the cost of coverage. The insured party should receive around 10% dividends on the cash value only but when deducting all the insurance companies administrative fees and commissions, the insured end up with dividends around 2.2% as reported by the consumer reports organization.

The cash value of your whole life insurance policy will not be taxed while it's growing. This is known as “tax deferred,” and it means that your money grows faster because it's not being reduced by taxes each year.

Nonetheless, the cash value can be accessed by the insured party in case of canceling or surrendering the policy and losing the death benefit. Many insurance policies feature a withdrawal clause that would allow the insured party to cancel the policy. A cheque will be given with the amount of the accumulated cash value.

The policyholders can also take a loan from this cash value without taxation instead of taking it from a bank which is known as Infinite Banking. It is not a loan from the cash value though.

Cash withdrawals are also considered an option to access the built-up cash value of the whole life insurance policy but are limited to the amount specified in the terms of the insurance policy. When exceeding the set amount, these cash withdrawals may end up reducing the death benefit that is received by the policy beneficiaries.

So, what do you think? Would you go for whole life insurance? Please let us know in the comments below.

------- Contents of This Video -------

00:00 - Introduction
00:54 - Whole Life Insurance History
01:20 - Tax Equity & Fiscal Responsibility Act (TEFRA)
02:10 - What is Whole Life Insurance?
02:44 - Whole Life Insurance Premiums
02:57 - Whole Life Insurance Death Benefit
03:36 - Whole Life Insurance Cash Value
04:05 - Investment and Dividends
04:51 - Withdrawal
05:09 - Loan and Interest Rate
05:57 - Example
06:37 - Scam / Rip off
07:25 - Family and Business

Websites:

[blairkinsman]

So if I got this right .. In the $500G example in the video, the premium was $430 a month from age 40. And aside from the car accident scenario, Nick lives to typical retirement planning age of 90.

So with whole life insurance, Nick pays $430 a month for 600 months (50 years) total $258G. Dividend is $130 a year best case for 50 years on the premium paid, or $6500, for a cash value of $264, 500.

The alternative is to buy term life insurance with extended duration and save the rest .. a $500G death benefit policy for a 30 year term would be about $60 a month leaving $370 available to save .. $370 monthly in the market at 7% (stock market lifetime average) in a tax deferred account gives me $432G after 30 years. I won’t need a $500G policy if I’ve got $432G cash in my account, so I cancel it, And for the next 20 years my account keeps growing at the full $430 a month. when I’m 90 the account is worth $1.9 million.

Conclusion is clear .:. Do I want $264.5G (whole) or do I want $1.9 M (term and invest) for the same premium output .. I choose term and invest !

[doublebassinyaface]

I was pitched Whole Life by a friend at NWM. I ended up turning it down. Seemed fishy. People keep touting the ability to take a "loan" from the cash value of the policy... But that's still YOUR cash. "Oh, but it's been growing at a 3% rate, though!"... Okay? I could take that same number and put it into the SP500 VOO index and watch it grow at 5x that rate. I'll pay some taxes, but the net at the end of the day is still WAY larger than if it'd been in a life insurance policy. If you can't take a loan out for greater than the cash value, there's no point. I invest in real estate, and I have a high yield savings (4.2%) account that I can take a zero-interest "loan" from any time. I also have a relatively cheap term policy with more coverage than what a whole policy would be. Whole life is a scam unless you fit into a very narrow window of people who might ACTUALLY benefit from it. Big thing here is COMMISSION. That's where all of your profits go. That's the fee you pay for not doing your homework.

[TheRockinator]

Seems much more like a scam to me unless the salesperson fully explains the downsides of an investment that is upside down for many years.

[jshaw]

Terrible investment on its own, but used as a middle ground between your income and the asset you're purchasing, is an amazing way to compound your return. The key is, use it to purchase things that will make you money, like real estate, or pay off large. I wouldn't use it to fund regular occurring expenses.

You use the lending component of the plan to fund your assets, as if you were taking loan from the bank. Except with the policy you're your own bank that you're constantly funding and building value into over time. After you take the loan from yourself, you pay yourself back your loan which just adds even more value to your plan. When you take a loan from you plan, you do not lose any interest on the total amount of money that you've put it.

Hopefully the way I explained it makes sense.

[okcgmku]

This is an extremely elementary explanation of what Whole life insurance is!!! Thanks!

[teambenjamin]

It really depends on the company. Some companies pay up to 6% dividends, and the death benefits can increase with dividends pushing the benefit up. And a few companies actually pay dividends on the entire cash value even if there is a loan taken out. Also, at a certain point, you can have the dividends pay the premiums and you have a fully paid off policy and No premium payment.

[shannontang]

Thank you for your video. I have learned a lot thank you. God bless everyone.

[NutmegThumper]

When I calculate the expense and the benefit over time, it looks like a low-risk mutual fund may be better. For my 50, 000 policy, it is quoted as $1, 650/yr. In 20 years (assuming I didn’t die) I’d have $33K in principal saved plus gains. Plus I’d have control of the money. Policy shows $9, 000 in dividends over that time, but I’m not clear on the financial benefits - especially if starting this closer to 60 than 40.

[ReliableisHere]

The only true investment is upgrading your skills

[DefinitelyNotRin]

The thing nobody explains either is that if you simply invest your money and have enough, you do NOT need life insurance at all. People will tout about the fact you can take YOUR money from the whole life insurance policy but if you had just invested it yourself it would be a much larger number. There's a reason why they are so desperate to sell you this and make commission.

[truthlemonade]

This video really makes it seem as if whole life insurance is bad for the customer and good for the agent.

[jessegreen]

This is an extremely elementary explanation of what Whole life insurance is/does. Great product for the right people. The right people, meaning people who make a lot of money and need tax protections.

[scaracci]

Sounds like it does not benefit anyone but the Insurance Company and the Person selling it....is that fair to say?

[slydog]

Mass Mutual offers 6% dividend (after fees). Not terrible alternative if the market has a rocky period.

[RomeyB]

What are those fees? Alot of people don't think to ask that. Yeah this isn't a good investment or form of protection.

[sportsnuttertv]

So this is most beneficial if compounding the account?

[nicksoboleski]

Nice!!! Making a suggestion that makes you, as the agent, money, at the cost of everyone you sell a policy to!!! Life Insurance is the WORST investment you can ever make!!! Buy term and invest in a ROTH IRA!!!!

[gbinman]

no way, whole life is about scaring and milking low income people.

[scaracci]

sound like horrible rates of returns and you have to pay to borrow your own money...is that correct?

[walesthinker]

When calculating annual dividends, should it be $5160 * 2.2% = $113.52, instead of $130? Let me know if there is something I missed!