Should I purchase a whole life insurance policy? (I am close to retirement)

Question

I am 65 and my wife is 59, we are planning to work until I am 70-72, and I plan to withdraw social security at 70. We have retirement savings of roughly $2,000,000 of which $1,600,000 is in mutual funds (mostly index funds) and $400,000 in TIAA guaranteed. We have also $400,000 of mutual funds in non retirement accounts and $650,000 in cash. Our current annual gross income is roughly $350,000-380,000. I have a term life policy of $750,000 and my wife has a term life policy of $250,000. We have a rental property that generates a net profit of $17000 per year. We have a total mortgage of $800,000 (split almost evenly) on our home and rental property at rates of %3.25 and $3.75. The $650,000 in cash is kept to invest if opportunities come (another rental property, or a low in the market).

Recently I have been approached by a TIAA representative that urges me to use my cash to purchase a "new" product that they offer. This is actually a whole life insurance that we pay $400,000 at the beginning and add $75,000 each year. The interest is %1.7 and the payoff upon death of "both of us" will be in excess of $1,000,000 during the first year and will increase to over $2,000,000. He says that we can withdraw our money at any time and the payoff will be changed accordingly, so our cash will be quite liquid with an interest of %1.7. Another benefit, according to him, is that the payoffs are tax free. The downside is that if we withdraw during the first year, the insurance will be cancelled. I was wondering if this is a good offer or not? It is advisable to go with this or put the cash in a balanced fund (I am thinking of Vanguard Wellington), or maybe use the cash to payoff my mortgages (although the rates on mortgages is really low).

Answer 1

First of all, congratulations on being in an incredible financial position. you have done well.

So let's look at the investment side first.

If you put 400,000 in a decent index fund at an average 8% growth, and add 75,000 every year, in 10 years you'll have about $1.95 Million, $800k of which is capital gain (more or less due to market risk, of course) - or $560k after 30% tax. If you instead put it in the whole life policy at 1.7% you'll have about $1.3 Million, $133k of which is tax-free capital gain.

So the insurance is costing you $430K in opportunity cost, since you could have done something different with the money for more return.

The fund you mentioned (Vanguard Wellington) has a 10-year annualized growth of 7.13%. At that growth rate, the opportunity cost is $350k. Even with a portfolio with a more conservative 5% growth rate, the opportunity cost is $178k

Now the life insurance. Life insurance is a highly personal product, but I ran a quick quote for a 65-year old male in good health and got a premium of $11,000 per year for a $2M 10-year term policy. So the same amount of term life insurance costs only $110,000. Much less than the $430k in opportunity cost that the whole life would cost you.

In addition, you have a mortgage that's costing you about $28K per year now (3.5% of 800,000). Why would you "invest" in a 1.7% insurance policy when you are paying a "low" 3.5% mortgage?

I would take as much cash as you are comfortable with and pay down the mortgage as much as possible, and get it paid off quickly. Then you don't need life insurance. Then you can do whatever you want. Retire early, invest and give like crazy, travel the world, whatever.

I see no compelling reason to have life insurance at all, let alone life insurance wrapped in a bad investment vehicle.

Answer 2

I'll start by saying that if this is being explored to scratch a specific itch you have then great, if this was a cold call it's probably safe to ignore it.

Certain whole life products (they vary in quality by carrier) can make sense for very high earners who are looking for additional tax preferred places to store money. So after you IRA, 401(k), etc options are maxed out but you still have income you'd like to hide from taxes whole life can be a potential vehicle because gains and death benefit are generally exempt from income taxes. Be on the look out for loads charged to your money as it comes in to the policy.

Life insurance in general is meant to keep your dependents going without having to sell off assets in the event of your death. People may plan for things like school tuition, mortgage/property tax for your spouse. If you own a business with a couple of partners it's somewhat common for the partners to buy policies on each other to buyout a spouse to avoid potential operating conflicts. Sometimes there can be estate planning issues, if you're looking to transfer assets when you ultimately pass it can make sense to form a trust and load cash in to a whole life policy because death benefits can be shielded from income tax and the estate tax calculation; the current estate tax exemption is about $5.5 million today (judging from your numbers you might actually be close to that including the net value of the homes). Obviously, though, the tax rules are subject to change and you need to be deliberate in your formation of the trust in order to effectively navigate estate tax issues. You seem to have a very solid financial position from this perspective it looks like your spouse would be in good shape.

If you are specifically attempting to manage potential estate tax liability you should probably involve an financial planner with experience forming and managing trusts; and you should be very involved with the process because it will absolutely make your finances more complicated.

Answer 3

There's nothing new about Whole Life Insurance. The agent stands to earn a pretty hefty commission if he can sell it to you. I don't think your assets warrant using it for avoiding the taxes that would be due on a larger estate.

I don't see a compelling reason to buy it.

Answer 4

Disclaimer: I work in life insurance, but I am not an agent.

First things first, there is not enough information here to give you an answer. When discussing life insurance, the very first things we need to fully consider are the illustration of policy values, and the contract itself. Without these, there is no way to tell if this is a good idea or not.

So what are the things to look for?

A. Risk appetite. People love to discuss projections of the market, like for example, "7-8% a year compounded annually". Go look at the historical returns of the stock market. It is never close to that projection. Life insurance, however, can give you a GUARANTEED return (this would be show in the 'Guaranteed' section of the life insurance illustration). As long as you pay your premiums, this money is guaranteed to accrue. Now most life insurance companies also show 'Non-Guaranteed' elements in their illustrations - these are non-guaranteed projections based on a scale at this point in time. These columns will show how your cash value may grow when dividends are credited to your policy (and used to buy paid-up additional insurance, which generates more dividends - this can be compared to the compounding nature of interest).

B. Tax treatment. I am definitely not an expert in this area, but life insurance does have preferential tax treatment, particularly to your beneficiaries.

C. Beneficiaries. Any death benefit (again, listed as guaranteed and maybe non-guaranteed values) is generally completely tax free for the beneficiary.

D. Strategy. Tying all of this together, what exactly is the point of this? To transfer wealth, to accrue wealth, or some combination thereof? This is important and unstated in your question.

So again, without knowing more, there is no way to answer your question. But I am surprised that in this forum, so many people are quick to jump in and say in general that whole life insurance is a scam. And even more surprising is the fact the accepted answer has already been accepted.

My personal take is that if you are just trying to accrue wealth, you should probably stick to the market and maybe buy term if you want a death benefit component. This is mostly due to your age (higher risk of death = higher premiums = lower buildup) and how long of a time period you have to build up money in the policy. But if a 25 year old asked this same question, depending on his purposes, I may suggest that a WL policy is in fact a good idea.