Correspondence With A Whole Life Insurance Salesman

An exchange of ideas.

I had an interesting experience recently that I want to share. 

I made a recommendation to a physician to cancel their whole life insurance policy because I felt it was inappropriate based on their situation. The salesperson who sold the whole life policy unsurprisingly felt differently and wanted to set up a three way conference call to discuss our philosophies. 

I refused the conference call on the basis that it was important for our rationale to be laid out in writing so that the physician who purchased the policy could thoughtfully review the reasons why I felt the policy should be cancelled, and why the insurance agent felt it should be maintained. I proposed a three-way email correspondence as an alternative to the conference call.

After a few back and forths, he agreed to send his recommendations over via email.

I’ve included our correspondence below. It is unaltered except for some formatting to make the content more presentable, title insertions so that you know who is writing, and removal of the physician and insurance agent’s identifying information. I’ve also removed the name of the insurance company providing the whole life insurance policy being discussed. 

So don’t be surprised if you see a few typos—this was an email exchange, after all. 

The insurance agent presented his rationale first, and then I responded and inserted my recommendations below the points he was making. 

After reading our correspondence, the physician felt it was in their best interest to cancel the whole life insurance policy. 

See if you come to the same conclusion.

Our discussion.

[BEGINNING OF EMAIL EXCHANGE]

Whole Life Insurance Agent:

Protection First: 

Protection should always be the first financial consideration. Before focusing on plans that will build your tomorrows, It is prudent to properly protect yourself against what might happen today.  "Unexpected Life Events" 

Donovan Sanchez:

I agree that an appropriate amount of life and disability insurance is fundamental to building a solid financial plan and should come before incorporating a robust investing plan. I would also add the necessity of having an adequate emergency fund in this step. 

Whole Life Insurance Agent:

Full Replacement:

The primary role of insurance is to fully replace the item being insured by maintaining coverage equal to the items complete appraised value. Therefore, your insurance should allow you to replace the whole house, the entire car, the real ring, and your full economic or " Human Life" Value. 

Donovan Sanchez:

I agree that insurance should provide protection so that one does not become financially destitute in the event of an injury or tragedy. When the individual becomes financially independent, however, the need for life and disability insurance declines. If a physician has built up enough wealth to the extent that they and their family would no longer be unable to achieve their life goals in the event of death or disability, the need for insurance diminishes. Life and disability insurance are not permanent fixtures in an individual's life, unless there is a viable reason to maintain coverage. 

Whole Life Insurance Agent:

Life Time Protection: 

Self insuring rarely pays off. You should select insurance STRATEGIES  that will properly protect you no matter how long you live.

Donovan Sanchez:

I would be interested to see your data for when "self insuring rarely pays off." For instance, a 60-year old married physician living within their means with a paid off home, no debt, and $3,000,000 responsibly invested seems to be in a good place for self-insurance. 

On the other hand, a 30-year old married physician with two kids and not a lot of cash or investments has a HUGE need for insurance. If she died, she might leave her family in a tight spot. This is why term insurance is so important—because it covers a temporary need for a death benefit. A need that goes away as financial independence is achieved.

Whole Life Insurance Agent:

So the recommendation of getting rid of protection that safe guards your source of wealth creation which is your cash Flow upon your untimely /premature death is incorrect. 

Donovan Sanchez:

Disability insurance (not life insurance) protects your cash flow. Life insurance provides a death benefit for your loved ones, but not protection for your wealth creation.


Whole Life Insurance Agent:

Remember, your Yearly Renewable Term was the best way to get you the most protection with the least amount out of pocket with the intention of converting to Permanent  Life Insurance in the future. In addition your current Whole Life Policy not only is providing you with protection it is also establishing liquidity in the form of cash value on your balance sheet for the purpose of life events. 

Donovan Sanchez:

I agree that term insurance is the best way to obtain life insurance. I do not agree that you should convert it to permanent life insurance in the future as a means of "establishing liquidity."

While the __________ [EDITOR’S NOTE: national insurance provider’s name removed] insurance policy does provide a cash value that grows over time, as you've seen, it grows conservatively. The product is not designed to provide stock-like returns. Additionally, you would have greater liquidity today if you would have put your money in a cookie jar than into the whole life policy. Your current cash value is significantly less than what you've paid into the policy so far.

A better approach is to buy the needed amount of term insurance, establish an adequate emergency fund, and invest responsibly for the future, instead of tying up money in an expensive whole life/permanent life insurance policy.

Whole Life Insurance Agent:

World Class Saver. 

Your priority should be to intentionally save 15-20 % of your Gross earnings. Your savings rate will always out preform a rate of return from market driven products. Developing this muscle memory to save first is ideal to wealth building and debt reduction. Frankly your savings rate is something you can control by making it a priority and being intentional with paying your self first. 

Donovan Sanchez:

Saving 15%-20% of gross earnings is recommended. I also fundamentally agree that an investor's savings rate is more important than their rate-of-return. The prudent investor should also direct their money to the most efficient and effective investments for their long-term goals. Whole life insurance is inappropriate based on your current situation.

Whole Life Insurance Agent:

Life Event Fund 

Your savings rate (15-20 %) should be deployed into liquid assets, such as Cash, Money Market Accounts, Regular Savings accounts, and Insurance Cash Values. 

Donovan Sanchez:

I disagree. 

As we've already seen, insurance cash values take years before they reach a break-even (again, consider how much you've put into your policy and how much cash value you currently have). Savings should first be used to build up a starter emergency fund. Once an emergency fund has been adequately established, savings should go either to paying down debt (if the interest rate is high) or investing. For young professionals with a long time horizon for investing prior to retirement, it is likely that they should invest a greater portion of their savings in aggressive assets with the potential for higher return (stocks).

Whole Life Insurance Agent:

The purpose of life event funds is to address life events such as emergencies and/or to take advantage of wealth building opportunities. Simply put Cash is King and having access without penalties provides peace of mind and financial security. Once you reached the threshold of a years worth of income in Life Events fund. Long term investment options should be considered. 

Donovan Sanchez:

The "life events fund" you describe is accomplished by having an emergency fund of 3-6 months expenses. There obviously aren't any penalties for using cash from a savings account to pay for unexpected life events, and the owner will benefit from peace of mind as well.

The 3-6 month's of expenses is an accepted industry standard. I've seen no industry research, or accepted financial planning principle, that suggests one should wait until they have a "years worth of income" prior to exploring long-term investment options.


Whole Life Insurance Agent:

Living Debt Free 

Eliminating debt especially bad debt like credit cards and high interest loans are vital to your overall wealth building potential. However should only be considered after establishing the first three healthy financial habits/rules. You see most Advisers are recommending that you pay your debt first without considering other parts of your financial life, such as protection and developing the muscle to save and creating a life events fund. 

Donovan Sanchez:

The standard advisor recommendation is that individuals establish adequate term life and disability insurance, build an emergency fund reserve, and then either invest or pay down debt depending on the debt's interest rate. 


Whole Life Insurance Agent:

So even when your debt is paid off, most Americans find them selves right back into debt when a life event strikes. Usually its because we are severely under protected  we never learned how to save the right amount and that leads to 0 life event funds or access to cash to help us when in need. So swiping a credit card or borrowing money is the only option. 

Donovan Sanchez:

This hypothetical scenario is true if disability insurance and an emergency fund aren't in place. I fail to see how this supports a recommendation for permanent life insurance. 

Whole Life Insurance Agent:

Using an uncommon approach, we teach our clients how to properly eliminate debt, while having access to cash, in addition to simultaneously creating the habit to save. 

Donovan Sanchez:

You'll have to ask yourself if this is true, __________ [EDITOR’S NOTE: physician’s name removed]. Do you feel you've been taught how to "properly eliminate debt?" Do you feel that your whole life insurance is allowing you to have "access to cash?" Do you feel it is helping you create "the habit to save?" 

Whole Life Insurance Agent:

Lastly, The reason you want to own Whole Life now and through out your life is simple. Leveraging permanent life as an alternative to bonds or safe money makes sense. 

Donovan Sanchez:

Just because permanent life insurance can be used as an alternative to bonds or "safe money" doesn't mean that it should be

Whole Life Insurance Agent:

Here are the characteristics of permanent life insurance.

Protection:

Premature Death Benefit 

Donovan Sanchez:

Term life insurance provides this too, for a fraction of the price.

Whole Life Insurance Agent:

Wavier Of Premium (Self Funding if you become sick/Injured) only self completing asset that i know of.

Donovan Sanchez:

Not needed. Disability insurance provides coverage for protecting cash flow.

Whole Life Insurance Agent:

Law suit Protection in Florida (check other States) 

Increasing Death Benefit.

Donovan Sanchez:

If one has obtained the appropriate amount of term insurance, this benefit is not relevant. [EDITOR’S NOTE: My reference to the benefit not being relevant refers to the “increasing death benefit” offered by whole life insurance. I’m not referring to the lawsuit protection claim that the whole life insurance agent is making.]

Whole Life Insurance Agent:

Asset: 

Part of your net worth, 

Provides a rate of return (Participating Policy) 

Donovan Sanchez:

As you have experienced, the rate of return is negative for years, and then conservative after that. There are better investment vehicles out there than permanent life insurance.


Whole Life Insurance Agent:

Minimal Risk (non Correlated asset) 

Donovan Sanchez:

Your long time horizon, and other factors, will likely indicate that you should take more risk now. Greater risk is what allows for the possibility of greater reward, especially over very long time horizons.

Whole Life Insurance Agent:

Liquidity ( Access to cash values anytime)

Donovan Sanchez:

The same is true for a bank account. Don't use permanent life insurance for a liquidity purposes.


Whole Life Insurance Agent:

Liabilities:

Tax Advantage Growth 

Donovan Sanchez:

Retirement accounts provide "tax advantaged" growth as well, plus the benefit of selecting the investment choices that you want. Traditional 401(k), and 403(b)s allow you to make contributions on a pre-tax basis, thereby allowing you to reduce your current taxable income. The growth in the account year over year isn't taxed either. Roth 401(k), Roth 403(b), and Roth IRAs are not taxed year over year and allow you to take your investment and its growth out tax free.


Whole Life Insurance Agent:

Alternate Credit Source

Donovan Sanchez:

You want to avoid debt, not use your whole life insurance to go into it.

Whole Life Insurance Agent:

Tax Advantage Withdrawal 

Donovan Sanchez:

Whole life cash values can be accessed without tax up to the amount you contributed in premiums. There's nothing special about this. Your bank account functions much in the same way. You don't get taxed on the amount that you put into the bank when you take it out. 

However, any gains on the cash value are taxable when you take them out, unless you take them out as a loan. So you don't pay taxes, but you do pay interest on the loan . . . why would someone want to do that when they could use retirement accounts instead? No need for complicated cash value loan planning there. Additionally, a Roth 401(k) or Roth IRA provides income in retirement tax free. 


Whole Life Insurance Agent:

Income Tax Free Death Benefit. 

Donovan Sanchez:

Term insurance provides the same.

Whole Life Insurance Agent:

Cash Flow: 

Form of Savings

Systematic 

Donovan Sanchez:

It's very simple to set up a systematic investment process where monthly contributions go to your investments. This is not a good reason to "invest" in permanent life insurance.

Whole Life Insurance Agent:

Flexible Funding Options 

Donovan Sanchez:

Same as above.

Whole Life Insurance Agent:

Flexible Distribution Options  

Finally, the beauty of fully paid up policy going into retirement is not the characteristics but its the presence of the fully paid fully owned death benefit which gives you the permission to consume other assets which results in higher cash flow to support lifestyle in retirement with out sacrificing legacy objectives. 

Donovan Sanchez:

You don't need permanent life insurance's death benefit to "give[] you the permission to consume other assets" in retirement. When the time comes, if legacy planning is desired, you can work with a qualified estate planning attorney to set aside a portion of your wealth to leave to your loved-ones at your passing. 

Whole Life Insurance Agent:

As opposed to what other advisers would recommend which is to simply live off of the interest. Living on the interest in retirement requires the most capital, yields the least amount of income and you pay the most in taxes and adviser fees along the way.  

Donovan Sanchez:

The purpose of working with a fee-only financial advisor is to develop a strategy to help you enjoy life today while responsibly planning for the future. Your advisor should be a fiduciary, meaning that they are obligated to put your interests first. Your advisor should not be paid on commission from the sale of insurance products like whole life insurance. This puts their interests in direct conflict with yours because they earn more money if they can sell you bigger, and more expensive, products.

The planning you conduct with the proper financial advisor should include implementing changes to help you achieve your long term goals, while utilizing investments that provides income for your needs when you're no longer working. Good advisors also help you develop strategies to reduce your tax burden as much as possible.

I believe that one of the first steps you should take in implementing this strategy is to cancel your whole life insurance policies. I appreciate _________ [EDITOR’S NOTE: whole life insurance agent’s name removed] providing his thinking, but don't believe it supports you maintaining a policy.

[END OF EMAIL EXCHANGE]

Some final thoughts.

Whole life insurance is not a bad product in and of itself. It primarily serves the purpose of providing a guaranteed death benefit. Because the death benefit is guaranteed whether you die at 55 or 105, the policies are much more expensive than term life insurance. My research and experience suggests that the vast majority of physicians and consumers do not need to utilize whole life insurance as part of their comprehensive financial plan.

I write about whole life insurance because it is often (OFTEN) oversold to consumers, physicians in particular. It’s possible that you were sold a whole life insurance policy as an alternative retirement vehicle, a “rich man’s” Roth IRA, or as a means of accessing tax-free income in retirement. 

If this is the case, I encourage you to review your policy and determine whether or not it is appropriate based on your circumstances.


Disclaimer:

The content you just read is for informational purposes only. Yes, I’m a financial advisor, but this article really isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply. 

So, please make sure you do your due diligence BEFORE implementing anything. Due diligence includes hiring a qualified professional who understands your situation completely and can offer you personalized advice.


Donovan Sanchez