THREE STORIES IN ONE WEEK
A whole life insurance policy that has been held for over ten years, paying in about $1620 into the policy each year, about $960 of which was supposed to go towards the separate account. The cash value after all that time was about $10,000. The owner of the policy and his wife are now out of work and were told to take a loan from the cash value to pay the premiums. Doing this, the cash value will last a few years before the policy lapses. If the owner gets back on his feet, he will have to pay the loan back as well as continue with the premiums to avoid lapsing the policy.
A whole life insurance policy that has been held for about seven years. The owner had been laid off a few years ago, drastically reducing his salary, so he has been taking a loan from the policy to pay off the premiums.
A whole life insurance agent that was ecstatic about taking someone's entire retirement savings and moving it into a whole life insurance policy. This policy is one of the newest flavors of whole life known as indexed universal life. From the best of my knowledge, this agent truly believed she was doing something good for the client despite how much money she made from the transaction. I believe that people who sell these policies either don't know or don't care.
ALSO KNOWN AS
Whole life insurance comes with many different names: whole life, universal life, indexed universal life, variable universal life, cash value life. Personally, I think the industry changes the name so that people don't recognize whole life when they see it.
RIPOFF
Retirement and College Savings: It is debatable whether it is even legal for agents to sell whole life policies as retirement and college savings vehicles. However, this is exactly what is happening. Insurance is not an investment! The purpose of insurance is to spread the risk to a large group of people but in the end, the insurance company is the one that profits. By the way, in general, it is better to save for retirement and then worry about college savings.
Inhibited Money Transfer: Whole life insurance agents often transfer retirement or other savings into a whole life insurance policy. However, if the owner changes their mind and wishes to regain control of that money, they may be forced to face surrender charges. In addition, the owner may find a lot of the money put into the policy is gone. It is much more difficult to move money out of a whole life policy than it is to move money into one.
Promised Rate Guarantees: Many policies guarantee specific minimum rates. The "guarantee" is based on the financial ability of the insurance company to pay. In addition, the company does not guarantee administration costs or mortality expenses, which means these can be raised at any time. If the company struggles to pay any guarantee, they have the option to pay the guarantee but with higher account costs. This means, families are getting a lot less money than they expected.
Optional Coverage for Life: Guaranteed renewable term insurance can be held until age 100 if desired but the owner can stop the policy at any time they desire. With whole life, the owner is placed into a "golden handcuffs" (as those in the industry call it), where the owner must continue to pay for coverage if they want the other benefits of the account. This coverage becomes very expensive as the owner gets older.
Fraudulent Commissions: Most people don’t know the commissions being paid for these policies. A high commission in general cannot be good for the client. For example, rolling over $150,000 into a whole life insurance policy will probably generate at least a $75,000 commission. If the owner cancels early enough some of this commission may be recouped since there are laws which allow a client to recoup commissions. However after a few years, the owner will not be able to regain the commission paid. Some companies have been sued when clients took out huge home equity loans to fund a whole life insurance policy. Please don't throw your entire life savings into one of these accounts!
Fake Tax Free Retirement: Many agents try to sell whole life based on tax free benefits by mentioning that loans are tax free. However, one could also take a loan using a house or stocks as collateral. Typically, taking a loan from a retirement account will allow the interest to be paid back to the account. On the other hand, interest from a loan against a whole life insurance account will typically be paid to the insurance company. A loan is always a tax free since the lender pays the taxes. Since when did taking a loan count as a tax free retirement strategy?
RECOMMENDATION
Go with the "Buy Term and Invest the Difference" strategy. This is a tried and true principle that continues to work. You may also want to learn why you might need life insurance and about the various types of term insurance. For more information, contact me anytime: scottizu@gmail.com.
Dedicated to Chris Izu.
This post was reposted from http://sizuservices.blogspot.com/2012/11/izus-ripoff-acronym-for-whole-life.html, originally written on November 24th, 2012.
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