Life Insurance Solves Financial Needs far Better than Retirement Accounts

[evanburnside12]

I posted this elsewhere before, but I just want to say that seeing this get taken down at r/personalfinance makes me wonder who exactly is in control over there. I made (what I think is) a great case for the flexibility of overfunded whole life insurance. What do you all think?

Let me explain. First, I must clarify that if you have credit card and other high interest debt, then pay that off first before thinking about anything else. Maybe get some term insurance, but that's it. Your first goal must be the elimination of bad debt.

Now with that out of the way, let me get to my point. You're in a good financial position. You have positive net worth and positive cash flow. Conventional advice is then to max out IRA and 401(k) contributions. I think that's a mistake, and let me explain why with an example.

Say 2 years down the line you've saved up 30k. Your car breaks down and you need a new one. You have about 10k in an emergency account, but everything else went to the retirement accounts. How are you going to pay for a new car? Are you going to break into the emergency fund? Well maybe. But it isn't enough to pay for a new car, and now you need to refund the emergency fund. So assume the new car is 30k. You're now paying 5-7% interest on the 20k difference while also putting money into your emergency account. Your additional retirement saving gets put on pause. Meanwhile you're making maybe 8% on your retirement accounts. At best you're a little ahead, but not much. The situation is a wash.

Let's look at an alternative. What if you have 30k in an account that doesn't earn as much interest, but that you can borrow at very low rates, about 4-5% these days. Your full 30k is still compounding if you borrow the money, and you don't have to dip into the emergency fund. All else being equal, this is clearly the better way. Lower interest rates and your emergency fund remains.

Being unable to access money that you've saved comes at a high price. It forces you to borrow from the bank at their interest rates and only the amounts that they're comfortable with. If the analogy is a business or investment loan then forget about it. The latter situation comes out way ahead because the bank is going to charge far higher interest rates.

The problem is summarized like this: your need for finance is more important than your need for a higher interest rate in a retirement account. And what's the vehicle for doing this? The concept generally hated by this sub: overfunded whole life insurance.

Do retirement accounts have tax benefits and higher returns? Yes, of course. The problem is that you can't access those funds, and so any analysis comparing whole life vs stock market investing needs to take into account opportunity costs. And when you take into account what you have to pay in interest while you're waiting to retire, then you'll see that whole life insurance is a far more attractive idea than many lead you to belive.

NB: I'm not an insurance agent and I have nothing to sell, despite what the trolls will invariably claim.

 

[resjudicata]

@evanburnside12 tl;dr: WLI is good for cash, investing in stocks is good for growing wealth faster than inflation eats it away. It's not an either/or decision.

I like the cash growth and benefits of whole life, but I don't agree that it's more important to fund more into a WLI policy while putting less (or no) money into real investments. Investing is for the long term and whole life will never ever ever ever ever outpace the long term returns of the stock market. Even if you get a policy when you're 1 year old and it's designed perfectly, and you compare that to the worst historical stock market periods, it's no contest.

I just looked at my own illustration: 60k becomes $191,234 after 30 years. The WORST 30-year stock market periods in a Monte Carlo simulation netted 359K. The median result was $1.2million.

No. Freaking. Contest. And frankly, it's not meant to be. If you're most people (not business owners or real estate investors) your hands down best investment is the stock market. The fact that I can contribute $30k a year into a special account and get back $10k at tax time is an added bonus. I'm enjoying doing Roth conversations at 12% right now

Now, if you're a real estate investor or run a business or for whatever reason need access to large amounts of cash on a routine basis, funnel more money into your WLI policy; frankly, you wouldn't have been investing in stocks anyway.

 

[evanburnside12]

@resjudicata Even if you're not starting businesses or doing real estate, you're regularly going to be financing large purchases. Cars are just the easiest example because they're quite large and tend to be bought every few years. How about appliances? Vacations?

And if you have a family like most do, then you have education for the children, new babies, on and on and on.

So given that we regularly are going to make large purchases, what's the best way to do it? Not retirement accounts. You can't use those funds for that. Savings account? Pitiful interest rates and when you take the money out you no longer earn interest.

The best way to finance this stuff is borrowing against a whole life policy. The returns are better than a savings account and you continue to earn interest on the whole amount regardless of how much you borrow.

Or you can continue to pile it all into retirement accounts and borrow from the bank at whatever interest rate they charge. Credit cards, personal loans. The interest rates aren't going to beat the rate you get from your whole life insurance company.

 

[resjudicata]

@evanburnside12 No, dude. Just no. Who is buying appliances every year? Or cars every 2 years? Or even every 5 years. You're not being realistic. How much f'ing money are you spending on huge purchases?

We're millionaires (not saying that to brag, but to make a point). We drive reliable 15 year old cars. We repair them as repairs come due because we don't feel the need to be flashy or keep up with the Joneses. These massive purchases don't come up as often as you're making it seem, or often enough to make prioritize a WLI policy over actual investing.

By the way, we became millionaires by working middle class jobs and *gasp* investing a portion of our paychecks. Neither of us made more than 6 figures. We use WLI as an excess cash bucket and bond allocation because we prefer the stable 4.5% growth rate. But to be absolutely clear: most of our money is actually invested. Because we want it to grow faster than inflation, not merely keep up.

WLI is a good place to store cash, agreed. It's NOT AN INVESTMENT, and should NEVER be a substitute for real investing.

 

[evanburnside12]

@resjudicata

WLI is a good place to store cash, agreed. It's NOT AN INVESTMENT, and should NEVER be a substitute for real investing

Look at the scenario I painted in the OP. For someone who is starting out they should be prioritizing having a way to finance the purchases that they will invariably make in life.

The typical advice is to have 3 months of expenses saved in an emergency fund. My argument is that this isn't enough and having it in a savings account is a bad way to do it. Instead people should focus on having a large amount of cash value in a whole life insurance policy, enough to finance any potential expenditures. And only once that is done should people think about retirement accounts.

Tl;Dr Having 100k invested in an untouchable retirement account and just 10k in a liquid emergency fund is dumb.

 

[resjudicata]

@evanburnside12 I'm indifferent to whether 3 months is enough of an emergency savings (that was fine with me when I was working, now I keep substantially more on hand). In a real-life, no shit emergency, you're a couple of mouse clicks away from accessing your money and any half braindead CPA or CFP (or just plain googling) can show you how to do it by the books to avoid taxes and penalties.

This is an important point: the effect of a young person waiting even 5 years to start investing that money because they wanted more (imaginary) flexibility is shocking. For a majority of the population, i.e., non-real estate investor or person funding a business, whole life insurance should make up a small minority of their assets and absolutely, positively should not be prioritized over real investing.

All due respect, when you make unrealistic arguments and assumptions like the one in your OP and subsequent comments, you reinforce the belief that the rest of the finance world has of WLI and the IBC community: that it's all a big scam and the people who sign up for it don't know what they're talking about.

I encourage you to talk to real wealthy people. Whether or not they have a WLI policy, I 100% promise you they didn't get wealthy by spending huge amounts of money on cars, vacations, and appliances. They worked hard, lived on less than they made, and invested.

 

[gill82]

@resjudicata I think in discussions like this it’s easy to talk past each other.

On the one hand, we have a discussion of “rate of return” and on the other we have a discussion of financing via life insurance.

Where I see the value of WLI is in the (for a lack of better term) “compression of time”.

Financial resources are always finite, and you usually cannot do everything all at once. So people start dividing their money into buckets and prioritizing things.

Let’s say you’re trying to save for retirement and also save up for a new car or something. Maybe you can’t do both at once or if you can you have to make concessions on both if you’re trying to do both at the same time.

If you did them “linearly” or in series, then rate of return becomes a huge factor. Whatever comes second probably requires a higher rate of return to meet your goals on a specific timeline.

Ex: if it took you 5 years to save up for a car, then you start saving for retirement, you have 5 fewer years to save for retirement and probably need a higher return to hit your future goal.

This kind of stuff must be happening all the time to people because what’s the median income in the U.S.? Not infinite. So things are always getting put off until some future date.

This is where I could see life insurance being a value, specifically the policy loan function. The money keeps growing inside the policy, even if you pause premiums to repay the loan. You can line up a series of purchases and have it work out due to the constant compounding of cash values, as opposed to using sinking funds and starting over after hitting each new goal.

 

[carolmariev11]

@evanburnside12 I don’t know why I can’t reply to your actual post but I have a question. In your post you say that you put 30k away in two years in a 401K and now you need that money. You say it’s better to have money in a whole life product. My questions is how much money would you need to put into WL policy to be able to access 30k in 2 years in cash value? Most WL life policies with large mutual companies don’t break even until the 12th policy year.

I think whole life is right for some things and should be a part of some peoples financial plan but telling people not to put money in a 401k and instead put it all in a whole life product is wrong.

 

[evanburnside12]

@carolmariev11 Design it better. Add a PUA rider and your breakeven is closer to 5 years than 12.

 

[resjudicata]

@evanburnside12 You again. Do you know what dividends are to receive those PUA? Are you familiar with the Treasury Decision No 1743?

 

[evanburnside12]

@resjudicata How does that change in any way what I argued? If you take the dividends as income it matters, but why would you do that instead of buying PUAs with them?

 

[resjudicata]

@evanburnside12 That just answered my question that you don’t actually know what the dividends are. Because your answer didn’t actually respond to My question.

 

[evanburnside12]

@resjudicata I know the answer to your question and it's irrelevant. Do you think that dividends just stop once they've paid as much as you've put in? No, they don't. Which is why you get taxed on any amount above it. Which is why you buy more pua with it so that doesn't happen.

 

[resjudicata]

@evanburnside12 I don’t believe you know what dividends are. Dividends are what you have already paid.

 

[evanburnside12]

@resjudicata Dividends don't stop getting paid once they reach the amount that you put in. You keep getting them. You're seriously misunderstanding dividends.

 

[lilmomma0727]

@evanburnside12 Any post about permanent insurance products will get taken down there. The mods are anti permanent insurance. I got permanently banned for asking people why they thought permanent insurance is a scam lol

 

[evanburnside12]

@lilmomma0727 It makes me think that the sub is owned by finance companies in some way. This is a theory I've heard with regard to Dave Ramsey and it certainly sounds plausible enough.

 

[lilmomma0727]

@evanburnside12 Agreed! I honestly think they have some affiliation with the white coat investor

 

[levnishbar]

@evanburnside12 This is reddit, though. You can run into a power hungry mod just about anywhere. I doubt it's related to any company, just some financial guys who dislike permanent.

 

[resjudicata]

@evanburnside12 Kinda spammy, dude. You're making all the misleading arguments that the sketchy LI salesmen make. Not saying that's you, but that's how you come off when you spam multiple groups with this crap.