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Ask Dave

Don't Lose the Friendship

Sheldon has a term life policy and wants to know how to explain to his friend why whole life is a bad idea. Dave gives Sheldon some reasons but doesn't think he should try to explain it to his friend.

QUESTION: Sheldon in New York City has a friend who is an insurance broker, and he’s encouraging Sheldon to purchase whole life. Sheldon has a term life policy and wants to know how to explain to his friend why whole life is a bad idea. Dave gives Sheldon some reasons but doesn’t think he should try to explain it to his friend.

ANSWER: I’ll be happy to give you the explanation, but I don’t think you should explain it to him, because he’s not going to listen. I have several friends who are in the financial world who disagree with me on this. They are wrong and we’re still friends, but we don’t sit and debate this, because I’m not going to change my position. I’m right. They’re not going to change their position, because they sell that crap every day. I’ve got some Democrats in the family too, and I just don’t discuss politics with them, because they’re wrong. I’m kidding (not much)! We just want to be friends. We don’t go places we can’t solve. I just wouldn’t do that.

Let’s take the average 30-year-old person, and if they were to buy a whole life insurance policy of $250,000 and they are healthy and they don’t have any medical problems, the average monthly payment for a $250,000 policy is about $178 a month. That’s the average of the top six companies right now. You pay $178 for $250,000. It builds up cash value inside of it—a savings plan inside of it, which term does not have. You’re probably aware of that. By age 50, the average person who’s 30 paying in 20 years of $178 a month will have a cash value of $34,000. By age 70, it would be $124,000. The problem with this is not that there’s a savings account in there, because savings is something that’s good.

The problem is basically the rules under which you’re saving suck. Here’s rule number one: It’s a horrible rate of return. The average whole life policy returns 1.2% nationally. Not a good rate of return. It’s more than you can get on a savings account but a lot less than you would get on a good investment like in a Roth IRA in a mutual fund. Problem number two: You can’t get your money out of the policy unless you do one of two things. You cancel the policy and lose the insurance, or you have to borrow the money out. This is money you’ve paid to put in there but now you’re going to pay them interest to borrow your money. That’s dumb.

Those two things are bad, but the thing that makes this a complete rip-off—and it makes it the payday lender of the middle class, it makes it complete crap—is you’re paying to build up a savings account and you’re paying for insurance of $250,000, but when you die—let’s say at age 50 you have $34,000 in the savings cash value—they’re going to pay out $250,000, not $250,000 plus the savings. You’ve been paying extra for the savings.

I’ll prove that to you. Here are the actual numbers. You can buy, if you’re 30 years old, $250,000 worth of 20-year level term for not $178 a month but for $13 a month, which means by definition the difference of $165 should be going into savings. Paying $165 a month for 20 years and only getting $34,000 is a lousy rate of return. Had you bought the term insurance for $13 and put the $165 in a decent mutual fund in a Roth IRA, at age 50, you would not have $34,000. You’d have $164,000. At age 70, you wouldn’t have $124,000 like the whole life. You’d have almost $2 million. And when you die, your spouse has the savings account, which is a whole lot bigger, and the insurance—not “I pay for two things and only get one.”

Here’s what you really ought to do. You shouldn’t do either one of those. You should spend $21 a month and buy $500,000, not $250,000. Get the proper amount of term life insurance because it’s very inexpensive. Put your $157,000 difference into savings. You’ll have plenty of insurance and plenty of savings that way.

Any time you combine savings and life insurance, you always get screwed on the savings element and you usually get screwed on the price of the insurance as well. No one recommends whole life insurance or cash value insurance anymore. No one except those who sell it. You cannot find an independent person like me. I don’t sell either one. I’m not in the insurance business. I don’t have an insurance license anymore. I had one once upon a time. I don’t make money from it. I advertise for Zander Insurance, but I don’t own any part of that company, and I’m not in the insurance business in any way. But you can’t find an independent consumer advocate—an independent financial mind—who has analyzed this anywhere who recommends cash value insurance. They don’t because it sucks. Anybody who can run a calculator can tell you that. It’s just not rocket science to figure out if I put $165 into savings a month and I die, they keep my money—it’s a bad plan.

If you want to argue with him about it, you can, but you won’t win the argument. If you win the argument, he has to quit doing what he’s doing because otherwise, he’s screwing people and he knows it then. An interesting question, if you’re just itching to get in a fight, is if I’m paying extra since I pay a lot more for cash value than I do for term, what happens to my savings when I die? If you want to pick a fight, you can go there. He’ll say it’s absorbed in the insurance costs. Translation: They kept your money. If I paid for insurance and I paid for savings and I only get the insurance amount at death, they kept my money. You can use whatever phrasing you want to use, but my money is still gone. It’s really a bad product.

Truthfully, he won’t be in the business in another year. There’s an 80% fallout in that business—people selling it. Eighty percent of them don’t make it two years. It sucks. They go around and sell their friends and relatives, and then anybody else they don’t have a relationship with won’t listen to them. They can’t make it in the business. It’s a horrible, nasty business, and people start to realize that. They get out of the business very quickly.

Don’t mess up your friendship over this, but don’t buy the stuff either. Later on, he’ll still be a friend, and he won’t be an insurance agent.

The average whole life insurance policy on a 30-year-old in America today, top six companies, $250,000 policy, is $178 a month. The average 20-year level term on a 30-year-old is $13 a month. You can put the difference in a fruit jar and come out ahead. Just get your grandma’s canning jar and put it in the kitchen. Just put it in the pantry, and you’ll end up with more money as an investment than you will end up investing in whole life insurance. You just don’t buy this garbage. It literally is the payday lender of the middle class. It has to be the worst financial product out there for the middle class. A close second is the car lease, and a close third is the credit card. The three of those are ensuring that those of you who are middle class, the more you use whole life insurance, car leasing and credit cards, the more likely you are to never get ahead, and of course some of you are going to blame that on the evil 1%. But it’s not their fault. It’s your fault. Now you’ve been told. Continuing to do it after you’ve been told is your fault.

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