Their is a place for nearly every financial product on the market today. With that being said, how do you implement a whole-life insurance policy for a family requiring $1,000,000 in coverage at an affordable rate? If their budget is under $100 per month, no whole-life policy on earth can be appropriately funded to provide the returns boasted in the above article. Is term an incorrect solution to such a common situation?

Thanks for the comment, Tom.

You are correct to address a person's insurance needs first. The issue is not whether or not to use a term insurance solution for that need. The question raised above is whether or not to use the failed strategy of buying term insurance and investing in mutual funds, which promise only that they promise nothing.

Your client could buy a whole life insurance policy, which guarantees growth of the cash value every year, instead. If there isn't enough money in the budget to buy all of the death benefit needed in the whole life policy, you can add term riders or a separate term insurance policy to supplement the insurance need.

If you'd like further information about the efficacy of whole life insurance as the fundamental financial vehicle in every successful personal economy, feel free to contact me directly. Better still, buy a copy of Money for Life!

I may agree that a mutual fund portfolio managed by the owner/shareholder, has proven to be a poor choice - mainly because most fund owners don't watch their investments on some schedule. Only when we have a massive downturn, as we have recently, do these people start to complain and play victim.

What is your opinion on investing the difference in managed money? I personally subscribe to the "invest the difference" crowd - and we invest the difference in managed money, which has sailed through this recent storm mostly intact (-6% on some of our money, up 8% on other money for a net gain). We own term life insurance and invest the difference in the qualified plans available to us, and have that money professionally managed. Everyone we know who does their own handywork when "investing the difference" is in mutual funds and has lost their tail.

We opted NOT to buy a whole life policy due to the fees vs. performance. Sure, the "returns" are guaranteed, but they are poor at best: 4% to 6% on a GOOD year (the problem is the available investment options usually stink). We have had double digit returns outside of an overpriced whole life policy, still had adequate life insurance, and we don't have to worry about keeping our investments up with the times (moving money as necessary to achieve absolute return). We are insured, making money on our investments, and out living life. Had we purchased the whole life policies we looked at, we would have to personally manage the investments (YUCK) and even then, the investment options are weak at best (no inverse funds, very often no specialty funds, currency funds, etc.)

Numerous academic financial books tout that whole life is a great product, but only if OVER-funded. Too often the policies are designed to achieve the lowest premium, hence they become underfunded and blow up years later. I've seen it first hand. Having said that - whole life is GREAT if one can OVER-fund it.

I know where your heart is. But remember that people don't understand money at all and they are trusting you to sell them the best product. For most people, term life is the right type of life insurance. For those maxing out their qualified plans and have their debt well under control, and still have money left over - it's wise to consider a whole life policy. Not before.

Tom

Tom, This reply comes in parts due to limitations of the comment area.

First, the "invest the difference crowd" refers specifically to those Behemoths that have institutionalized the concept, rely exclusively on mutual funds, and see it as the only way to manage peoples' money - mainly because it's the way the Behemoth makes the most money..."Damn the torpedoes! Full speed ahead."

Second, your bias is apparent throughout your comments. Your language clearly aims to discount any positive benefits of whole life as the foundation of a personal economy. In addition, you do not seem to address the concept of "personal economy." Instead, you focus on "investments," "returns," and "qualified plans."

Third, John Maulden is an investment economist not a life insurance guru. His concern is the misrepresentation of bond investments over stocks. His conclusions support the prudent investment strategy of mutual life insurance companies.

I'll try to address your comments in the same sequence that you made them.

A. Blaming the victim...
You blame fund holders for not watching "their investments on some schedule." Wrong. People who sell investments and then blame the buyer for not paying attention are simply mouthing the shibboleths created to protect Behemoths and promulgated by failed regulatory agencies. It's advisors and pundits [Suz, Dave, etc.] that keep telling America to stay the course as the value of their money decreases daily. It is the advisor's responsibility to keep his or her clients informed and to keep their money safe even when the talking heads and the Behemoth mouthpieces say otherwise.
PS - The "play victim" comment implies an attitude that parallels the above. Investors are victims in the sense that they put their trust in an advisor, but don't fully understand that the investments they buy offer NO guarantees and the advisor is absolved of both legal and moral responsibility once the transaction is complete. [Excluding fraud, of course.]

B. Some details...
1. My personal investment advisor owns his own business and adheres to the practice of using professional fund managers in lieu of mutual funds. That is a laudable approach in my opinion. However, to use it to the exclusion of all others is less than prudent. Investments, no matter how you describe them, are gambles. Gambling all of your clients money...not a good idea.

2. Qualified plans are a tax trap. The IRS recovers all of the tax deduction given during a working career within two to three years of the first post-retirement withdrawal and gains between ten to twelve times what it gave before the retiree leaves this earth. ERISA is the single most damaging piece of legislation written in the 20th century for this reason if not for the dozens of other money-grabs it allows our government. I strongly recommend against putting any money into qualified plans unless and until the client has secured his or her personal economy. [See the conclusion below for a definition of "personal economy".]

Part 2...

3. “I ain't so much concerned about the return ON my money as I am about the return OF my money." Will Rogers, circa 1923
-6 and +8 --> 2% gain? That sure beats the heck out of a 40% or 50% loss. However, there are taxes, fees, etc. which likely reduce the 2% return even further but still beat the market by a large margin. But, how much of that success is just plain luck? I might win a jackpot on my first pull at the slot machine, spend the next day trying to duplicate that result, and still walk away with winnings. No control here. Just luck. I’d be money ahead if I quit after the first win and put the cash in a simple savings plan.

4. Whole Life Insurance...
You seem to be describing a universal life insurance policy, specifically a variable UL policy, and not a whole life policy.
~ Whole life policies do not have any variable fees.
~ They have guaranteed returns. You cannot lose money in a whole life policy.
~ They pay dividends, which are not guaranteed but are consistent over long periods dating back over 100 years.
~ Dividends once paid are guaranteed to accumulate earnings tax free and generate dividends of their own.
~ The IRR of a quality whole life contract is typically between 5.5% and 6% over time.
~ The growth in a whole life contract is tax free making the tax equivalent yield required over the same time period from a competing approach to be between 8.9% and 9.7% [38% bracket - soon to go much higher]. Add transaction fees, commissions and management fees into the mix and the return needed to compete with whole life goes higher still.

5. Academic books...
Again, you are referring to universal life contract and not to whole life. Moreover, academicians have not lived the past forty years helping real people with real problems manage their real money. I have. The academics speak from a theoretical perspective and - obviously - don't know beans about whole life insurance. Your comment about the failure of UL contract to meet the long-term needs of clients are spot on. It doesn't apply to whole life.

6. Your conclusion...
a. The best product for building a foundation for a personal economy is whole life insurance. Your conclusion is wrong because you do not have a solid grasp of what a whole life insurance contract is, how it works, or when it is appropriate. That isn't your fault. Obviously the folks who trained you didn't do their job.
b. Your clients shouldn't consider investing at all until they control their personal economy...
~ are debt free,
~ have secured an income they don't have to work for and can't outlive,
~ have enough ready cash to cover three to five years of gross earnings and deal with any emergency or opportunity that arises,
~ have a secure legacy of wisdom and wealth to pass on to those they care about

I suggest you buy Money for Life - How to Thrive in Good Times and Bad and discover that there is another safer and better way to wealth.


Health, Abundance, Love and Light,

Jeffrey Reeves, MA