Whole life insurance (WLI) is one of the most complex and controversial topics in the financial world. Some financial mavens say WLI is basically a scam. Insurance folks counter that it’s actually the misunderstood secret path rich people use to “bank on themselves” and build wealth. Some WLI customers love the product, while many more thoroughly hate it. So what gives?
To help cut through the confusion and angry mobs on both sides, I’ll begin with a mashal.
Let me just say first, I’m very grateful to Yitzchak Goldsmith, CFP of Goldstar Investment & Insurance, and to Yoel Yitzchok Bodek, CEO of Brokers Central, an independent life insurance agency, who were extremely helpful in researching and preparing this article.
Like a House on Wheels
An RV is often described as a “house on wheels,” a phrase which captures both its appeal and its weakness. An RV is neither a real house nor a typical car. That hybrid nature makes certain experiences possible that no other form of travel can offer—but it also creates limitations and costs that many buyers underestimate.
When those tradeoffs are understood and managed, RV ownership can be deeply rewarding. When they are ignored, it can turn into a frustrating and expensive mistake. Think being stranded in a storm, with a bunch of kvetchy kids, in the middle of nowhere, with an overflowing toilet tank and no power!
Buying With Eyes Wide Open
Now it’s obvious and appropriate that the RV industry will highlight its potential to create dream vacations. But to purposefully downplay or even hide the potential downsides, complexities, burdens, and costs of the unique hybrid product would be wrong and a recipe for disgruntled customers. And if many people are buying RVs, thinking they are getting either a superior car or a fantastic house, we clearly have a problem. Because it is an RV, not a house and not a car.
What’s Whole Life Insurance? A Financial Hybrid
Whole life insurance mirrors the combo makeup of an RV. It is a hybrid financial tool that combines a permanent life insurance policy with a complex savings/investment account embedded within it. Permanent here means that, unlike term life insurance, which ends at a specific predetermined term, or number of years, WLI is designed to last till death, at whatever age. And as myriad eager insurance agents can’t wait to explain, WLI can whisk you away to some exotic financial destinations.
Permanent Life Protection + Backup Cash Liquidity = WLI
Due to its hybrid nature, WLI offers features that a simple life insurance policy or investment account cannot easily replicate. For example, some need the permanence of WLI to protect lifelong dependents, for estate-tax-planning purposes, or to guarantee a legacy regardless of market conditions. Term insurance won’t cut it for them.
WLI’s savings/investment component enables rapid tax-sheltering and creditor protection (in many states) of even massive sums while mitigating the volatility inherent in liquid assets such as stocks and bonds. Over time, a WLI cash-value account can serve as a conservative investment sleeve, insulated from market swings. These are unique features of WLI that may be valuable to some.
From a behavioral perspective, too, WLI can be an inducement to think long-term and accumulate stable assets. Cash value built up within WLI is accessible in a pinch without triggering gains taxes or a loan rejection. Plenty of people who would not otherwise be accumulating large sums end up doing so once relentless insurance agents push them to buy WLI policies.
For some households, this combination, permanent life insurance coverage, savings motivation, staid long-term growth, tax deferral, creditor protection, and estate-planning utility, provides a form of financial resilience that term insurance and traditional investment accounts don’t.
High Cost + Slow Growth + Complexity = WLI
But WLI’s hybrid design also creates significant drawbacks. On the insurance side, permanence comes at a steep cost. The annual cost of WLI is far higher than term insurance premiums for the same death benefit. That high cost often leads people to buy less premature-death coverage than they actually need, while straining their cash flow to the max.
Worse, in many, many, real-world cases, WLI policies lapse WAY before they ever reach maturity, leaving buyers with hefty losses, disappointment, and, worst, gaps in vital insurance protection, an outcome that undermines the primary purpose of life insurance.
On the savings/investment side, the trade-offs can be severe, too, if not properly understood. While the WLI “savings account” side can indeed protect and accrue cash value, it is an inefficient vehicle for growing and compounding money, especially in the crucial early years of a policy. Here’s why.
WLI’s heavy insurance costs and brokerage fees are front-loaded, leading to negative returns for the first 5 to 10 years of the policy. In some fee-heavy policies, the break-even point can be even longer! So it’s generally a poor choice for meeting short or intermediate-term financial goals such as children’s weddings. But WLI is broadly marketed as a tool for these objectives.
For the very long-term investor, i.e., supposedly the primary target of WLI, cash value accruals lag what simple growth mutual funds (such as S&P 500 index funds) deliver. WLI barely compounds, lacking the keystone component of wealth creation.
WLI can supplement or replace the bond component of a long-term portfolio, but WLI doesn’t easily fit with many regular people’s financial realities and objectives. It’s not an approach to pitch broadly and simplistically to the masses, which the insurance industry definitely does.
Complexity Leads To Confusion, Conflicts, and Costs
Many agents counter, “Fine. But we’re all adults. Why can’t buyers simply do their due diligence? And if they buy WLI with eyes wide open, what’s the issue?”
This is where buying an RV and the whole life insurance policy differ greatly. It is easy to understand the pros, cons, and costs of buying an RV. So there’s minimal likelihood that a generally intelligent and alert RV consumer will, purposefully or mistakenly, get “taken for a ride”. Same for most of the myriad products and services we shop for all day, every day.
But whole life insurance and other insurance/investment products are so complicated that even many of the agents selling them do not fully understand them! Also, there are myriad ways for WLI agents to surreptitiously structure a policy with much greater fees and far less benefit to the client.
This reality creates a very strong shochad, which we know can blind even the greatest of tzadikim. It’s extraordinarily difficult for most consumers to know what they are getting into, at what cost, with what restrictions. Open eyes don’t help when things are masked in fine print, confusing charts, and arcane language.
Shooting the Messengers?
Most insurance professionals acknowledge that WLI is complex and often mis-sold. They agree that many newbie agents aren’t well-informed and some load up WLI policies with hidden costs to maximize their commissions.
But they correctly point out that some bad apples do NOT make the whole WLI industry or product illegitimate. The insurance industry also correctly points out that many of the SAME issues plague other finance niches, which attract far less criticism. And that commissions for WLI can be far less burdensome over time than long-term asset management fees charged by many investment advisors, who accuse WLI of being too costly!
To that, I say: let’s try to improve all of the above. Many wrongs do not make any rights. And I have yet to meet an unbiased financial professional who didn’t agree that WLI is oversold to the myriad masses, causing significant financial setbacks to many Regular Joes.
The significant lapse rates prove that many WLI sales shouldn’t be happening. Instead of shooting the messengers pointing this out, the industry should clean up its act!
Do What Works For YOU
While most frum families should default to term life insurance and simple mutual funds, you should do what works best for you. Bottom line, many knowledgeable, savvy customers who do understand WLI’s trade-offs still wholeheartedly embrace them. Kol hakavod.
If you understand WLI, are attracted to its full package, and find an ethical, knowledgeable agent (there are plenty of them, too), go for it. While I personally know people who’ve been burned by WLI, some of my savviest friends love WLI. Hopefully, you’re now more educated about the potential pros and cons and can proceed from a place of knowledge.
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