Whole Life Insurance: Follow The Facts, Not Stories

Salespeople love telling stories and many whole-life agents are trained to use them to emotionally convince people to buy pricey polices. While there is inherently nothing wrong with using anecdotes as a sales tool, be assured that for the most part, only the success stories are related. I’m not an insurance agent, but I have plenty of my own stories about whole life insurance that went bad. While “permanent” life insurance does have a place for some, it only works properly over long decades of consistency.

Frum families with pressing short-term financial needs like buying homes, paying tuitions, and making simchas have a very high chance of lapsing their whole-life policies prematurely, leading to significant financial loss. If you’re a good candidate for whole-life, buy it because it makes financial sense, not based on anecdotal stories. As a counterbalance to the many emotional pitches you may receive, here are some cases of LOUSY whole-life insurance experiences which came my way within just a few months.

Affording a house versus whole life

Sruly and Esther each had a term policy, but they also started a $250,000 whole life insurance policy as an investment. After paying $4,000 annually for four years, they realized that after buying a house, there was no way they’d be able to continue making these large payments. Their broker explained that if they stopped the policy now, all they’d receive back as cash value was $1,600, locking in a loss of $14,400 (payments of $4,000 x four years minus the $1,600 they’d get back). With no choice, they took the $1,600 check and canceled the policy. Although starting the plan was obviously a terrible mistake, by stopping it now at least they wouldn’t get deeper in the hole.

The chasunah plan that wouldn’t grow

Isaac and Devorah realized they had to get serious about saving up for their daughters’ future weddings. A friend who was an insurance agent proposed a whole-life policy where they’d put aside $4,000 annually for 20 years. He assured them that banks and wealthy people used these policies to invest because of its sustained growth and tax benefits.

Isaac was ready to sign on the dotted line but asked his financially savvy relative to run the numbers first. It turned out the growth was almost nonexistent. The policy’s return on investment was negative until year 10(!), and even at year 20, ranged from just 1.4% (guaranteed) to 4.2% (non-guaranteed) annually. If they would need to stop the investment over the short term, they would lose a lot of money, but even after 20 years, they would get a return comparable to CDs’, a pretty bad trade-off. Isaac and Devorah were glad they did their homework and disappointed that their friend had proposed such a bad investment to them.

The good news is, he lived. The bad news is, they have no money.

Aaron and Ilana were in their 60s and couldn’t afford to keep up the $1 million (guaranteed universal) permanent life policy Aaron had paid into for 25 years. The policy had cost $8,000 annually, more than five times what a 25-year term policy would have cost ($1,500) even though it was a type that did not have any “cash value” investment component. Although the policy wouldn’t grow in value (as regular whole life does over the very long term), the agent had convinced them that the lifetime price-lock guarantee of a permanent policy was necessary to protect Ilana into her 70s, 80s, and beyond. But Aaron wasn’t able to work as many hours at age 65, and with less income, he had to stop the policy, making the lifetime price lock irrelevant.

The couple had paid an extra $162,500 in added insurance fees for a lifetime price lock that they couldn’t even use ($8,000 – $1,500, the difference between term and permanent options x 25 years). (The lifetime lock is so expensive because with permanent insurance, as long as payments are made, the insurance company will undoubtedly have to make a payout). While happy Aaron hadn’t triggered a death payout, the couple now had no savings to live on. If instead of paying for an expensive and ultimately abandoned guarantee they’d have invested the $162,500 (at 8.35%), it would have grown into a $500,000 retirement nest egg.

Leave the stories out of the decision-making

Are my stories any more or less useful for decision making? No! Selecting financial options based on cherry-picked anecdotal evidence is a bad idea. Despite the insurance agents’ heartwarming stories, hard evidence shows that many  people do not do well with permanent insurance. It is often best to buy a term policy and leave the stories for the books.

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