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I'm 37 years old and paying $1,500 per month for a whole life insurance policy; is the high cost worth it for the low yield, or even promised long-term value?

I purchased a whole life insurance policy four years ago. The premium is $1,500 per month. The reason I purchased the policy was to provide an alternative source of income during market down turns, the possibility of tax-free income from dividend payments, and the option to borrow against the policy if I need to raise capital to make a purchase at some point. I also purchased the policy for the purpose of estate planning. After four years, I'm not sure whether the high monthly cost over a long time period, and for such a low yield, or even the promised long-term value, is worth it. The current assumption is that there will be almost $1.5 million in cash and $2.6 million in insurance at age 70. I am currently 37 years old.

What's the best approach for me? Should I change it into a paid up policy, increase the term and invest the difference? If it's not a good time for me to have a life insurance policy, should I purchase one at some point?

Financial Planning, Estate Planning, Investing, Choosing an Advisor, Taxes
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May 2018

As someone who is a 34 year financial advisor I feel I can relate to your situation.  Prior to becoming an advisor I wholesaled to a wide range of advisors and bought into the "Bank on Yourself" idea and purchased a whole life insurance policy for my wife.  After paying the premium for five years I gave up and surrendered the policy, it just doesn't make sense for us.  If you take what I am investing in that policy and compound it out over our lifetime then I am much better off with the investment.  We had a broker sell one of our physician clients on a whole life insurance policy for her and her husband, and they were paying $1,500 a month.  He sold it as a "Roth for the Rich" and said it was better than investing in the 403(b) at the hospital.  If she died her family would have received the million dollars in life insurance, but the insurance company keeps the cash value.  After we surrendered the policy and set her up with a term life insurance policy then her family would receive the million dollars in life insurance AND the money in the 403(b).  People don't get rich off life insurance while they're living, and I saw too many life insurance policies that were not set up correctly where the owner had to pay back the loan or the entire loan would become taxable.  There are policies designed specific for this type of investing, but you won't get it through a typical broker.  If you fall into the very small percentage of people where this makes sense (and I would say even if your income is there then you're still too young) then you'll want to work with a high end broker.  

We work with many physicians and large families, but our philosophy is to not let the tax tail wag the investment dog.  There is a lot of tax planning that can be accomplished prior to buying whole life insurance.  All I would ask is that you get a second opinion.  If you build a net worth that you have an estate problem then that's an awesome problem to have.  With this much time prior to accessing your retirement money then I'd focus on lowering fees and when appropriate diversifying investments to private equity, hedge funds, etc.  The point is to build enough wealth to be self-insured and not pay for life insurance at all.

Good luck to you,

Matt Ahrens, CIMA®

May 2018
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May 2018