Before just saying buy term and invest difference or whole life is a scam, please read the entire post. I do not work in the insurance industry and have no friends trying to push a policy on me.
Background - My wife and I just had our first baby. We both work. She is finishing up fellowship and starting full time this year as a surgeon. I graduated an M7 a couple of years ago with minimal debt. Our combined income will be pushing $500k next year. Neither of us currently have life insurance outside of what are employers provide (1.5x salary... I think). Both of us are pretty much salaried only, variable / bonus is a small piece. Last, we have a decent amount already in 401k / 403b and IRAs, and max out these accounts each year, plus looking to buy a house next year for $1.5-$2m. We are what I would describe as "working rich".
Thoughts / Question - As I think holistically about my retirement plan, there needs to be some amount allocated to several asset classes with varying risk. Whole life, seems like a low risk, low return, uncorrelated asset (consistent ~5% dividend from big mutual companies + cash value can never go down) that provides potential tax benefit. To me, it seems like it makes sense to have a whole life policy that will provide ~1.5 years of income in retirement to allow my portfolio to recover if the market tanks along with an additional tax advantaged source of funds in other years. So if I am trying to hit $10m to retire, maybe I would have ~$350k - $500k in whole life.
Welcome any feedback, especially folks at this stage in life: house, kids, maxing retirement accounts already.
I used to sell life insurance for a few months, but am young and not an expert, so I certainly could be missing details. I understand what you’re saying about using it as a sort of risk hedged, diversified asset, and think that ultimately you will make a decision based on your risk profile, which is valid.
The only thing I can contribute is to reaffirm the math behind the claim that in general, in pure dollar amounts, you are WAY better off investing the premium you would be paying for a whole life policy into your standard equity ETFs instead, then starting to buy term life insurance once you need it. When I used to sell policies to people (sold both term and whole life) I would play around with investment calculators after closing a deal, testing out “so what if they paid this into an ETF instead of a premium”… and the takeaway was that unless they were unlucky and died abnormally young, the ETF wins by a factor of multiple, multiple X every time… term insurance was way closer to a reasonable expected value.
The “benefit” of whole life, of locking your rate in young, is not worth it too. Better off letting the money compound: it’ll compound faster than the growth rate on your premiums
Makes sense. So you're saying even accounting for taxes and everything else the gap is so large that term makes the most sense.
Do you have a guideline for how much cash value a whole life policy will increase to? Currently have a quote for $300 per month on a $200k policy that is paid off at age 65 (~30 years from now). The premiums alone are worth ($3,600 x 30 = $108k), so assuming some growth in there, where can you expect to be?
Not OP, but the pegged interest rate isn’t great. Insurance company is making money one way or another, so you won’t get the full average bond yield they say it adheres to.
An advisor I respect said whole life is only worth it if you need to minimize taxes and all other tax advantaged avenues are spoken for.
Here is a curve ball for you. An insurance policy is an agreement. You face defaulting on your end should you ever go through a job loss, disability, get sued, and so forth. When you default, the surrender value is pennies on the dollar.
Safer to buy term and invest the difference should you come up on hard times and no longer be able to afford the premiums.
To your first point - That is where I think I am at. 401k and IRA's are maxed and not straining our budget.
To the second point - The liquidity piece is not something I have considered too much. I've mainly focused on, "25 years from now I need $X spread across a 50 / 50 portfolio, small whole life policy, and $Y home equity. Both of us have relatively stable jobs (doctor and F500 LDP), so I would say our income is less risky than client advisory roles, but nothing is for certain. Getting to year 25 is something that I need to account for. Thanks!
I’m sure you’ll do what’s right.
Also, congrats on the new baby!
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