Insurance agents and some financial advisors (but not the ones included in our financial advisors database for physicians) love to pitch whole life insurance policies, especially to high-income earners like physicians, so we frequently get questions in our Facebook communities from members getting pitched policies by their agents or investment advisors.
There’s a reason for this: the person selling the policy gets hefty commissions. Don’t get us wrong, we like life insurance. However, most physicians just need to lock in a term life insurance policy, which is much cheaper and gets the job done. Along with estate planning, these are are important keystones for the security of those that depend on you and your income.
There are a few situations where whole life may be an appropriate recommendation, which we’ll discuss below, but in many (?most) cases, products that mix insurance and investment are fraught with issues and conflict of interest. While this article focuses on whole life insurance, most of the concepts are applicable to any form of permanent life insurance that may be sold to you.
If you’re new to the topic of life insurance, visit our guide to life insurance for physicians.
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Quick Links
Resources
TLDR - Major Talking Points to Know
How Whole Life Insurance Works
Arguments That May be Used To Sell You A Whole Life or Permanent Policy (and why many are flawed)
What Type of Life Insurance You Should Have
When to Cancel a Current Policy
DIY Whole Life
Conclusion
Life Insurance Resources for Doctors
Where to buy life insurance: Use a broker who can run rates across multiple companies and help you navigate your options. It doesn't cost you anything to use them. You may be comfortable just talking to one company, or you may want to run a few quotes to feel confident in your decision. Generally, the difference in prices will reflect which discounts each company has access to. These are our sponsors/advertising affiliates, who thousands of members of our groups have used and said positive things about.
Visit our insurance agents for physicians page to learn more.
Learn more about life insurance and life insurance options:
How to find a financial advisor: If you currently have a financial advisor who isn't a fiduciary and pitches you whole life, we have a guide on how to choose a financial advisor that explains why a fee-only advisor might be a better fit, as well as a list of fee-only advisors to interview.
TLDR - Major Talking Points to Know
In most cases it doesn’t make sense to mix insurance and investment. Insurance should be used for its intended purpose, and it’s much cheaper that way. The money you save in premiums with a term life insurance policy instead of a permanent life insurance policy will grow much better over time invested in a conventional three-fund portfolio or other investment vehicle than in an account which yields a very low rate of return and has lots of fees.
The cash value on a permanent life insurance product averages 1-3.5% in returns after fees (compare to the market, which has averaged 6-8% historically, and 10% in recent years).
There are specific estate planning situations where whole life may be an appropriate approach, but these should be suggested by an estate planning attorney and not an insurance agent. These include special needs situations or very large estates that exceed the estate tax exemption (currently 12.92 million per individual in 2023, so almost $26 million for a married couple).
If you already have a whole life policy, the decision to cancel it should be approached carefully based on how many years you’ve had the policy and after consideration of the tax ramifications.
How Whole Life Insurance Works
Whole life is a type of permanent life insurance, which generally combines insurance with an investment product. you are covered by the policy throughout the remainder of your life, as long as you pay the premiums accordingly to your plan documents. Other common types of permanent life insurance are universal life, variable universal life, and variable life.
Learn more about the different types of permanent life insurance.
Whole life insurance plans offer a death benefit and a cash value savings component, which grows at a guaranteed rate. The terms of the premiums and death benefits are set and remain fixed for the life of the policy. You will generally pay either an annual or monthly premium for a set period of time or until you die, depending on how the policy is written.
The death benefit is the insurance side of whole life, offering a fixed, guaranteed amount your beneficiary will receive upon your death.
The savings component is the investing side of whole life, where a cash value accumulates with tax-deferred interest. This cash value can be accessed by the policyholder during their lifetime, and withdrawals are tax-free up to the total value of premium payments already made.
Part of each premium goes toward both the death benefit and the cash value.
The Catch: Whole life insurance policies are heavily front-loaded with fees and commissions. Some whole life policies take over a decade before your premiums start generating a cash value more than what you've paid in. This means that for up to a decade (or longer!) you have a negative rate of return on your investment. The cash value of your policy if you were to cancel it in this situation is less than you've paid in premiums to the policy holder. The younger you are, the more detrimental this is to the compounding growth potential of your money before retirement, especially when you combine the low investment returns. The annual rate of return on a whole life policy's cash value averages around 1% - 3.5%, while the average stock market return if you were to invest the money yourself would be closer to 7% - 10%.
Arguments That May be Used To Sell You A Whole Life or Permanent Policy (and why many are flawed)
Assertion: You can borrow money against your policy if you need money for something.
Why this is flawed: It’s not that simple. In most plans we’ve seen, you’re not borrowing against your own account, but from the company who sold you the policy and they’re using your policy as collateral. This means that you’re still paying interest. Even if the interest rate is lower than what you’d typically get with a personal loan, it is significant (often 4-6%). While there’s no application, if you don’t pay it back before death, there will typically be a deduction from your death benefit, which may be above the value you borrowed. We know people that want to pay for college this way; a 529 plan is much better in this regard - you get the tax benefits and you don’t pay interest.
Assertion: This is a guaranteed return on your money, while the stock market is unpredictable.
Why this is flawed: Well, yes, the stock market is unpredictable within a short time frame, but over time, we’ve got many decades of data to show that historical market returns are about 7-10%, whereas no whole life insurance policy we’ve seen is giving returns over 4%, and many are as low as 1.5%. Honestly, right now, most of the short term investments like high yield savings accounts and money market funds are outperforming the whole life policies significantly. Also, insurance companies aren’t necessarily the most stable. While there are protections in place to protect insurance companies, state guaranty associations only protect so much of your payout if the company goes bankrupt, and it’s usually not a 7 figure amount.
Assertion: You are a high income earner that needs this for estate and tax planning purposes.
This may or may not be flawed. Here’s where you should listen and consult an estate planning attorney if you believe that your net worth is going to fall above the estate tax exemptions (currently at 12.92 million per individual in 2023, so almost $26 million for a married couple). If you don’t foresee yourself crossing this threshold, then this argument doesn’t carry a lot of weight. Do not trust the insurance agent on this - if you are in this category you have a lot of reasons to talk to an estate planning attorney anyways, so wait for them to give you pros and cons. If you have a special needs child, this could also be an important estate planning tool for you.
If the above doesn’t apply to you, then recognize that while your heirs do get the life insurance payout tax free, they also get almost all non-retirement account investments tax free because of the step up in basis incurred to reflect the value of your assets on the day of your passing.
Assertion: You want to retire early. What happens if you want to withdraw money before you are eligible to start drawing from your retirement accounts without a penalty? With normal retirement accounts you can’t withdraw money without a 10% penalty before 59.5.
Why this is flawed: There are lots of nuances here. For one, your death benefit will probably be reduced if you withdraw against it, and based on your cash value, the reduction in your death benefit can be greater than the amount you withdraw, depending on your policy’s terms. Two, while you don’t pay taxes against withdrawals, you do pay interest, so you’re paying interest to access your own money. Three, there are actually loopholes in the tax code that allow you to withdraw money from your retirement accounts earlier than 59.5 if you retire early.
Assertion: This is a great tool for asset protection.
Why this is flawed: Be careful about state laws. Your retirement accounts are much better for asset protection. Many states don’t protect whole life policies, or have caps of a few thousand dollars that are protected. Also, before you let your paranoia lead to a bad financial decision, realize that most physicians don’t need as much asset protection as they may think - the chance of being sued past your insurance limits is much lower than most physicians think.
Learn more about tax-advantaged retirement accounts with asset protection.
What Type of Life Insurance You Should Have
The vast majority of the time, you want a term life insurance policy. The premiums are vastly cheaper for a term policy than a whole life policy with the same death benefit.
Term policies give you a death benefit without the cash value investment portion and last for a set period of time (typically 10, 15, 20, or 30 years). The ultimate goal is to save enough so that in retirement, as term policies become increasingly expensive, you can self insure and not need a policy. To self-ensure, paying off debt and saving for retirement are key. Learn more about where to start on our personal finance primer.
If you have a medical concern that limits you from getting a term life policy or may in the future, or are one of the few Americans that the estate tax will effect, a universal life policy might be a better option as it allows more flexibility than a whole life policy. To learn more on the different types of life insurance, visit our guide to life insurance for physicians.
When to Cancel a Current Policy
If you've already purchased a whole life policy and believe you should not have, you may either be tempted to get rid of it. Holding onto a bad product because of the money you've already invested usually falls under the sunk-cost fallacy. Throwing more good money at a bad product doesn't usually make the product any better, but it's important to assess your specific situation.
If you're ready to pitch your whole life policy, don't cancel immediately off of a gut reaction. There is some research to be done. If you have had your policy for many years, and your cash value is more than the amount you’ve paid in premiums, there could be tax ramifications. Also, once you’ve gotten past the first decade of holding the policy, the returns may be a little more palatable and you may not want to give up the policy. Call the company and ask for an illustration of what would happen if you canceled your policy or stopped paying premiums, and take this data to a trustworthy financial advisor or accountant to discuss what the best option is for you.
Also, if you aren't self-insured yet, get a term life policy in place before canceling your whole life policy. You don't want a situation where you discover you're uninsurable under a term policy after canceling the whole life one you have, as having to get a new permanent life insurance policy to replace the canceled one makes you reset your fee and commission timeline over again.
DIY Whole Life
If you are drawn to the idea of the investment component of a whole life policy, there's a cheaper and better way - you can make your own do-it-yourself whole life policy.
Instead of buying a whole life policy and paying out the broker's commissions and the insurance company's fees, price out both a whole life and term life policy and note the difference in monthly/annual premiums. Buy the cheaper term life instead, then invest the difference between the premium amounts into your own investments. Something like a three-fund portfolio is easy to learn and will have much lower fees with higher rates of return, allowing your money to grow exponentially faster.
The added advantage of a DIY plan is when you die, your beneficiaries get to keep the accumulated investment value you've made instead of turning it over to the insurance company. With a whole life policy, your beneficiaries only receive the stated death benefit. The insurance policy keeps any remaining difference between the cash value and death benefit.
When you invest on your own, you also never have to take a loan from yourself. You own the funds outright in your brokerage account. You can sell them at any time if you need to (though it's best to let them sit and grow until retirement). If you have different funds and are dollar cost averaging by investing what your premium difference every month, you can potentially minimize taxes by selling shares strategically and/or tax loss harvesting.
Conclusion
As discussed above, there are a few situations in which whole life policies make sense. The vast majority of the time, however, you're better off buying a term life policy until you can self insure and investing the premium differences on your own. If you have questions about insurance not answered on our life insurance page, feel free to ask the hive in our Facebook communities!