Whole Life Insurance Critics Aren't Serious

By David Lewis

Commentary December 13, 2019 at 03:17 AM

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Norman Dacey. "Art" Williams. Suze Orman. Dave Ramsey.

What do they have in common?

Other than being famous and controversial figures, they also happen to be some of the fiercest critics of whole life insurance. What they promise to consumers is a comprehensive education on life insurance, but what they deliver instead is inauthentic, sophomoric advice. Their ideas and criticisms aren't serious.

If you raised an eyebrow after reading that last sentence, let's consider the types of arguments these (and other) critics raise against whole life insurance.

Most arguments revolve around just a few key issues:

Premiums for whole life insurance.
Commissions paid to agents on whole life insurance.
Rate of return on whole life insurance.
The need for life insurance after retirement.

Premiums for Whole Life Insurance

An attack on whole life often begins with a bizarre comparison of whole life insurance premiums with term insurance premiums. After acknowledging that whole life insurance is a product which combines life insurance with a savings or investment fund, critics then tell their audience that term life insurance premiums are much cheaper than whole life insurance premiums. And, because of that, you can buy much more term life insurance per dollar of premium than you can whole life. Therefore, term insurance is "better."

If only it were that simple. As all critics freely acknowledge, whole life insurance combines life insurance with savings. Because of this, premiums will always be higher because of the savings element of the policy. This is the meaning of the phrase "buy term and invest the difference." The "difference" is the money that goes into the savings portion of the policy.

The implication is that a better form of savings exists elsewhere, outside of a whole life insurance contract. Now, that's a legitimate idea worth pursuing, but the implication being made by critics isn't that premiums are higher due to the savings element but rather because whole life insurance is somehow a more expensive form of insurance than term insurance.

A more realistic view is presented in Albert Easton and Timothy Harris' stand-out textbook "Actuarial Aspects of Individual Life Insurance and Annuity Contracts," wherein the authors write:

"Whole life is sometimes considered to consist of two pieces, the reserve and the net amount at risk; the difference between the reserve and the amount of the death benefit. When considering whole life in this way, the policy is described as consisting of two benefits: a savings account and decreasing term insurance."

Easton and Harris's view isn't new, nor is it simply the subjective opinion of two life insurance actuaries. In 1979, the Federal Trade Commission published a Cost Disclosure Report on life insurance, making it explicit that embedded within the bundled whole life product are two different, but complementary, components:

"Although the premium for a whole life policy remains the same as long as the policy is in force, the actual amount of death protection bought by the level premium declines each year as the cash value increases. For example, a 35-year-old man will pay approximately $200 a year for a $10,000 whole life policy. At age 70 this policy will have a cash value of approximately $6,500. Thus, the person is actually only buying $3,500 of insurance."

This is the meaning of the cash value in a whole life policy. It is a reserve against the death benefit which helps defray the cost of insurance by decreasing the amount of it in the policy over time.

The concept of "net amount at risk" is uncontroversial in the life insurance industry, and yet it remains largely unacknowledged (or unknown) by critics. What Easton and Harris explain, and what the FTC made explicit, is fundamental to the structure and functioning whole life insurance — it is built on a decreasing term life insurance chassis, and it is inseparable from the savings element, because whole life insurance is a "bundled" insurance product. The insurance is bundled with a rising cash value to ensure the cost of insurance does not rise to unsustainable levels.

Indeed, the 1979 FTC report states that, "It should be noted that all forms of insurance are expensive after age 65."

Level term life insurance is generally not sold beyond age 65 for this very reason. And, term policies which contain renewable provisions beyond age 65 are typically annually renewable policies, meaning the premium is guaranteed to increase each and every year. Those increases are substantial and reflect the cost of providing term life insurance at ages where the statistical probability of death is higher than at younger ages.

What readers can glean from this is that the total cost of insurance is intimately tied to mortality tables, not product type. What differs between product types like whole life, universal life, and term insurance is how the costs and other policy charges are amortized over the life of the contract. Term insurance is typically a 10- or 20-year policy whereas whole life can stay in place until the insured reaches age 120. If there is a difference in the appearance of life insurance costs, it is because term insurance is a short-term policy — shorter relative to whole life insurance.

Contrary to what the critics say, high premiums are desirable in a whole life policy, because high premiums necessarily lead to a large cash value — a large amount of savings.

Commissions Paid to Agents

According to Suze Orman, "Many agents love to steep people into 'permanent' life insurance plans… What they don't often mention is that the commission they earn on a permanent policy is a lot more than what they will get if you buy the term policy."

Of course, as written, Orman is right. Any full-fledged rebuttal to her appears to be a strawman, since she never mentions any other costs associated with buying term life insurance. Important to note here is that term life insurance is never purchased in a vacuum. Policyholders never choose between whole life insurance and term insurance. They choose to buy whole life insurance or buy term and invest the difference.

To reiterate, whole life insurance is a combination of insurance and savings, while term insurance is simply insurance. Because of this, people who buy term insurance must accumulate savings on their own, outside of the whole life policy. Meaning, they must buy investments and incur some kind of expense for said investment. Although Orman never mentions investing, what's implied by the idea of "cheap term insurance" is also the idea that "investing the difference" is cheaper than paying commissions on a whole life policy… except that it isn't.

For the breakdown for commissions for both whole life and term plus investment fee, click on these links to see a set of commission charts.

Net Annual Outlay for $1 Million in Whole Life

Self-Managed, Low-Fee Mutual Fund, Plus $1 Million in Term Life

Self-Managed Mutual Fund With an Investment Advisor Fee

Commissions on whole life insurance are typically paid one of several ways. The lowest compensation level for an insurance agent is sometimes referred to as "street comp." Typically this is 50% or 55% of the premium paid on a life insurance policy in the first year. Subsequent year commissions are substantially lower. An experienced agent may earn overrides, which increases his or her total compensation for selling the insurance. Overrides apply to both term life and whole life insurance, and they can substantially increase an insurance agent's income.

If a 35-year old male, standard, non-smoker policyholder had $10,000 per year to allocate to whole life insurance or towards a "buy term, invest the difference" strategy, the tables above show that an agent earning "street comp" on whole life would net $9,800, amortized over 30 years. An agent earning high overrides on the policy, might earn total compensation of $18,550 over 30 years.

If that 35-year-old male instead chose to buy term and invest the difference, and he earned 6% annual returns on his investment, and did not pay an investment advisor any money to help him, and had an ultra-low expense ratio on his mutual fund, and no other investment or administrative expenses, then he would pay a total of $15,601 (assuming low term insurance commissions) or $16,960 (assuming high commissions on term life insurance). That is the only scenario when total fees and commissions are potentially lower than the commission costs for whole life insurance. Even so, they aren't substantially lower than an agent earning high overrides on a whole life policy. And, if the agent is earning "street comp," the commissions and fees are higher for buying term and investing the difference.

Of course, many investors do pay an investment advisor for at least some advice. This would mean the total fees and commissions would likely exceed commissions on a whole life policy by a wide margin. In this example, a 1% advisor fee combined with low-cost mutual funds results in over $83,000 in total fees paid over 30 years, and that's just for the investments. If an investor somehow manages to earn 12% on his investments, the fees top $194,000 over 30 years, compared to commissions of just $18,550 for a well-compensated life insurance agent.

What we can learn from the above illustrations are two facts:

Fees and commissions on whole life insurance are tied to premium payments.
Fees and commissions from investments are tied to investment account balance.

Naturally, investment fees rise as the investor's investment balance grows. This is to be expected. But, what is also to be expected is that whole life insurance commissions do not rise as the cash surrender value of the policy increases. Commissions are paid only on a percentage of the premium paid.

Even so, these commissions are not out of line compared to a combination of term life policy commissions plus expenses for mutual funds. In fact, in many instances (and especially when the investor uses an investment advisor that charges fees for assets under management), the fees are a good deal lower on whole life insurance.

The reason for this isn't intuitive, though perhaps it should be. Life insurance companies, greedy for customers, must offer competitive commissions to agents, but must also remain competitive to investors and potential policyholders in the broader marketplace. If they didn't do this, whole life insurance would disappear in a heartbeat. Hidden in plain sight is the obvious truth that, for every buyer, in every marketplace, there is a seller. The life insurance business is no different. Life insurance agents (i.e. the sellers) are matched to life insurance policyholders (i.e. the buyers). Without agents, there are no policies to sell. Without policyholders, there are no policies being sold.

Insurance companies are not stupid. They know they are competing for always scarce investment dollars. If those dollars flow into mutual funds, it means fewer dollars flowing into whole life insurance premiums. Even when commissions are high, they can never be "too high," as some might suggest, else this would collapse the life insurer's whole life business.

The very thing whole life insurance critics chastise the life insurance industry — and life insurance agents — for is the one thing that keeps life insurers competitive: the profit motive. Specifically, commissions.

The Rate of Return on Whole Life Insurance

In a video titled "Why Is Term Insurance Better Than Whole Life Insurance?" uploaded to YouTube in 2016, Dave Ramsey confidently stated that, "On average it's [whole life insurance] making 1%-1.5% — horrible rate of return… It is one of the worst financial products on the market today."

Though he doesn't mention it, Ramsey's most likely source for this rate of return claim is the 2015 Consumer Reports article, "Is whole life insurance right for you?" In that article, Consumer Reports cites the guaranteed return on whole life insurance as 1.5%. They also state that the possible future return on whole life cash values is 3.5%.

It's not entirely clear where Consumer Reports obtained this information, but the fact that Consumer Reports, and Dave Ramsey, cite a fixed rate of return as the maximum potential for whole life shows the unseriousness of the critique. Most whole life insurance policies sold today are participating whole life insurance. Participating refers to how interest credits are added to the policy. Participating policies are named so because they participate in the experience and performance of the life insurance company. In other words, when a whole life policyholder buys a participating whole life insurance policy, they're not just buying a product. They're buying a business.

It should now be obvious to any casual reader why Ramsey's and Consumer Reports' claims can't be true. For, if the claims were true, it would be the first example of a business — and, more broadly, an entire industry — running a static operation for over 100 consecutive years and, in some cases, for over 150 consecutive years. The critics imply life insurers are static, unchanging, entities and thus project static future values on their products.

The reality is the opposite. The life insurance industry is dynamic and changes and evolves over time, and it is because of that fact that participating whole life insurance returns have never been static and will likely never be static in the future.

It's true that whole life insurance has a guaranteed cash value which grows at a predefined rate for the life of the contract. But, it is also true that mutual life insurers pay dividends to their participating whole life policies — dividends which change over time. And even though specific dividend payment amounts are not guaranteed, all mutual life insurers have paid dividends to their policyholders for over a century. That they do is a function of the fact that they run profitable businesses which run huge surpluses — surpluses which must be returned to policyholders in the form of those highly valued dividend payments. These dividends, which are usually used to purchase paid up additional insurance, grow the death benefit and cash value of the policy.

Life insurance companies project future dividends based on their current business operating environment. But, once again, that environment changes over time. Thus, using a static assumption of future whole life policy performance misses the bigger picture, and the truth, that dividend rates and dividend scales can and do change over time. Which means, projected future values on whole life insurance change over time.

This is most apparent looking at historical dividend rates.

For example, policyholders who bought a whole life policy from a major mutual life insurer in 1978 and held it to 1998, realized an incredible return. In 1978, the dividend interest rate at MassMutual, for example, was 7.80%. The company's total dividend scale also reflected reasonable to low operating and mortality expenses. By 1986, the dividend rate skyrocketed to 12.20% and the mortality and operating expenses did not have a net negative impact the overall dividend scale. As a result, policyholders received far more than the guaranteed rate, far more than 3.5%, and far more than originally illustrated by their insurance agent.

Now, on the other hand, policyholders who bought whole life from MassMutual in 1990 and held to 2010, saw dividend rates (and the total dividend scale) drop during that time, from 10.50% to 6.70%. While mortality and operating expenses generally improved during this time, it was not enough to offset a falling dividend rate. Those policyholders still made far more than the guaranteed rate in the policy, however… far more than 3.5%, but realized lower-than-originally-illustrated returns. This was not unique to MassMutual. All insurance companies saw declining dividends rates and scales during this time period. And it had nothing to do with the life insurance policy, per se, but rather the inescapable reality of falling interest rates in the bond market. Life insurers use bonds to provide the guarantees of whole life insurance. They also use bonds (among other investments) to generate excess interest for dividend payments. It should be no surprise, then, that falling bond rates would eventually impact dividend rates.

The trend reversed course in 2012, pushing the dividend interest rate at MassMutual up to 7% and then to 7.10% before falling to 6.70% and then 6.40%. Other mutual life insurers experienced similar types of fluctuations in their dividend rates, some more dramatic than others.

Once again, what can be concluded from this is that dividend payments are not guaranteed and change over time with interest rates, investment performance of the insurer's other investments, and overall company performance, including the number death claims paid and savings on operating expenses. Saying that whole life insurance pays a low rate of return is a gross oversimplification, lacking in context. And, when compared with other financial products of similar risk profile, it is simply not true that whole life pays a low rate of return. In fact, even when compared to conventional investment products, there are periods of time when whole life insurance has outperformed traditional investments. More on that, later.

The Guardian Life Insurance Company of America is another example of how dividend rates change over time. It publishes its dividend rate history from 1959 to 2018 (as of this writing). Its dividend rate in 1959 was 3.30%. If Dave Ramsey and Consumer Reports had used its then 3.30% projected future return assumptions for The Guardian, they would have been way off.

Guardian consistently increased the dividend rate during the 1960s, 1970s, and 1980s, to peak at 13.25% in 1984, before slowing and gradually falling to 5.85% in 2018. So, for 30 years, policyholders consistently received more than they were promised (i.e. the guaranteed rate) and even more than the projected dividends at the start of the policy.

But, even without reading the historical dividend studies from these insurers, one could easily deduce that life insurance companies are not static entities. Like all businesses, they change over time. They grow, they shrink, and they're constantly investing to preserve the mutuality and return as much surplus as is feasible to policyholders to drive down the net cost of insurance and provide maximum value to policyholders in order to keep those policies on the books.

MassMutual and The Guardian aren't outliers, either. Reports from independent analysts, like the late Roger Blease (Blease Research's "Full Disclosure"), show 20-year historical returns on whole life insurance exceed the 1.5% guaranteed return cited by Ramsey and Consumer Reports.

Indeed, one such report looked at policies issued in 1984 by 8 mutual life insurance companies. The policies were issued on males, rated non-smokers, aged 45 and males aged 55. Blease Research tracked the actual performance of those policies up to 2004 — 20 years. In every case but one, the participating whole life policies returned no less than 3%, and in most instances, policyholders received an annual compound return on cash values of between 4% and 5%.

Blease Research's Full Disclosure reports span many years, with many different starting and ending points, and each report consistently shows that returns on participating whole life insurance exceed the guaranteed illustrated rate, but ultimately depend on when the policy is purchased and how long a policyholder holds onto it. The 20-year return on whole life, for example, is higher than the 10-year return. And, for brave policyholders willing to stick it out for 30 or 40 years, the returns can rival more conventional investments.

A prime example of this was highlighted on the blog of the Internet-famous "White Coat Investor." The "White Coat Investor," AKA Jim Dahle, is an emergency room doctor turned amateur financial guru. While Dahle spends a lot of time blogging about non-insurance related issues facing doctors, he also has one of the largest collections of blog posts on the Internet dedicated to criticizing whole life insurance. Dahle is fond of beating up on whole life insurance and the insurance agents who sell it. However, even this critic had to admit the long-term return on whole life insurance wasn't too shabby.

In his January 2013 post titled, "A Whole Life Insurance Success Story," Jim Dahle tells us that:

"I recently had an email correspondence with a reader who had read through the posts on the blog about WL. He calculated out his return on his whole life policy and found it to be 7% after just 29 years. His initial email was asking me to show him where his error was because he was sure after what he had read that his return couldn't really be 7%. I quickly confirmed that, indeed, his return was 7%."

So far, so good. The policy was issued by Northwestern Mutual — a stalwart mutual life insurer. Despite the fact that Northwestern Mutual has seen its dividend trend downward over the last 30 plus years (as have all mutual life insurers), Northwestern has managed to return a significant amount of its surplus back to its policyholders as a dividend. And, for the 29 years leading up to the date of Dahle's post, that return has been a very competitive one. Dahle considers this a whole life insurance success story, but quickly follows it up with:

"It's relatively easy to see what kinds of returns stocks and bonds have made over the last 29 years. Just to keep it easy, let's look at the Vanguard 500 fund and the Vanguard Long-Term Treasuries fund returns since inception (1976 for the 500 fund and 1986 for the treasuries fund.) Their returns were 10.51% and 8.6% respectively. I'd argue that if you used 1983 as a start date, the returns would be even higher, since treasury yields from 1983 to 1986 fell from 10.5% to 7.50 and the S&P 500 had returns of 22%, 6%, 31%, and 19% from 1983 to 1986… you could have invested in ANY combination of stocks and bonds in 1983 and had a better return than the whole life policy, by at least 1.5%."

Let's check the math on that. This post was published in 2013, and Dahle tells us this policyholder bought his policy in April of 1983.

Historical Returns of The Vanguard Long-Term Treasuries Fund (VUSTX)

Using historical price data obtained from Yahoo! Finance, we see the price of VUSTX in May 1983 (April's data is not available) is listed as $1.12 per share, adjusted for splits and dividends. By the end of December 2012, that share price had risen to $9.83. If the Northwestern policyholder had bought into VUSTX, contributing to it month in and month out, it would have resulted in a 29-year gross return of roughly 8%.

However, that's just the gross return. The real return would be net of taxes and other administrative fees. If the investor cashed out his entire investment after 29 years, the net after-tax value of the account (assuming the policyholder could defer federal taxes the entire time until the end of the holding period and claimed 1 exemption in 2013) would have been about 6.6%.

Historical Returns on The Vanguard 500 (VFINX)

The price for shares of VFINX in April of 1983 was $8.14 per share, adjusted for splits and dividends. By the end of December 2012, the price of VFINX was listed at $114.85 per share. Even if the whole life policyholder invested consistently in VFINX, month in and month out, from April 1983 to the end of December 2012, his gross return before taxes would have been about 8.5%, not the 10.51% "return since inception" implied by Mr. Dahle.

At first blush, an 8.5% return seems low for an equity fund. Especially when compared to the VUSTX — a U.S. Treasury fund. However, stock markets are extremely volatile. And, as Lance Roberts of Real Investment Advice explains in his blog post series, "The Myth of Stocks for The Long Run," "The 'value of compounding' only works when large losses are not incurre… markets spend a good deal of time declining and retracing those declines. These are long periods when investors are not compounding their wealth."

It should be no surprise, then, that stock markets routinely fail to deliver their long-term projected average returns. And, when investment returns do materialize, they may match (or even fail to match) the returns of more conservative investments… or even guaranteed insurance policies. This is exactly what happened with VFINX. The frequency of losses in the fund caused investors to spend many months and years retracing and recouping those losses, wasting time and diminishing the investor's long-term return.

In this specific instance, had the policyholder-turned-investor taken his investment in a lump sum, claiming just one exemption for the year in 2013, his net after tax return on his VFINX investment would have been roughly 6.43%.

To be fair, most individuals don't take their retirement savings as a lump sum (or rather, they're advised not to by financial planners). Still, even if the investor took systematic income withdrawals from his investment account, and his average effective tax rate was just 15%, this would have resulted in a net return on his bond and stock mutual funds of roughly 6.8% and 7.22%, respectively.

What About Managed Mutual Funds?

On May 17, 2012, Dave Ramsey posted the following to his Twitter account: "I own a mutual fund with a 11.98% average return since 1934, 13.4% average over the last three years. Is your investment adviser too STUPID to find this?"

Ramsey is, of course, referring to The American Funds Investment Company of America (AIVSX), which is the much-respected managed mutual fund which has been in existence since 1934. This mythical fund is said to have delivered outsized performance to investors over long periods of time. Even Morningstar lists the return since inception as 12.03%. But, the myth is just that. For every fairy tale of stellar performance, there's reality.

Looking closely at this fund's share price change over time, adjusted for splits and dividends, reveals its Jekyll and Hyde persona.

In January 1986 (which is as far back as Yahoo! Finance data goes), the price of AIVSX was $2.04. In November of 2019, the share price had risen to $39.83. That means for every $100 per month invested (i.e. regular monthly purchases of AIVSX) in AIVSX, and assuming no taxes or other fees were paid, the value of the investor's shares, adjusted for dividends and splits, amounted to $184,823.37. That translates into a total compound annual return of just 7.89% — more than 4% lower than fund's advertised return since inception, and even less than Ramsey's glib tweet suggests investors will earn.

An investor paying an average effective tax rate of just 15% would see his net return drop to under 7%. By investing in AIVSX, the policyholder would have earned less than the returns of his Northwestern Mutual whole life policy, but would have taken substantially more risk.

The reason investors never received their 12% "average return" from this fund is once again explained by Lance Roberts: "The 'value of compounding' only works when large losses are not incurred…"

Managed funds, like The Investment Company of America, have sustained many losing months throughout the years, and even losing years. In addition to market losses, AIVSX charges hefty fees for investment management, effectively compounding market losses when they occur. As such, investors have spent many months and years recouping those losses, diminishing their long-term return. Even if we use 2013 as the ending date (to compare returns with the Northwestern Mutual policy and Jim Dahle's all-index fund approach to investing), the returns for AIVSX don't change much.

What About Term Life Insurance?

One of the things not emphasized enough in Dahle's post, and really all comparisons of whole life insurance against a direct investment in a stock (or other financial) market, is the fact that this policyholder doesn't just have a savings with whole life insurance. The policyholder also has life insurance. Regarding Jim Dahle's analysis, the premise here is this policyholder had a choice back in 1984 to buy whole life insurance or buy term and invest the difference. This is what this post is really getting at without making it transparent — that investing is better than buying whole life insurance.

But, there's a caveat baked into these types of analyses. Once again, to avoid strawmanning the critics, it must be noted that whole life insurance cannot be accurately and objectively discussed without talking about the insurance aspect of the product and the essential comparison being made. If you're going to compare whole life insurance to something else, the assumption — whether openly stated or not — is that you also need or want life insurance. If all you wanted was an investment, you likely would not buy life insurance and an insurance company would likely not sell you a life insurance policy. And so, the cost for that insurance is inherently included in every honest analysis.

So… what was available in 1984?

Yearly renewable term life insurance was very common, as was five-year renewable term insurance. A level-premium "term to age 65" was also available, but as noted in the 1979 FTC Cost Disclosure Report on Life insurance: "The early year premiums for this form of term insurance are significantly higher than traditional renewable term."

The Internet was also not available back then, and thus the ability to easily compare and shop prices across the U.S. with a few clicks was simply not possible. Most of the time, people purchased a term policy that renewed annually or that renewed every five years. Each renewal came with incrementally higher premiums.

As the yearly renewable term premiums rose, they would have eaten away at the policyholder's ability to "invest the difference," as more and more investable dollars were used to pay term insurance premiums, resulting in a lower investment account balance in spite of achieving an arguably good rate of return from both VFINX and VUSTX.

If the policyholder had found a company willing to sell him a "term to age 65," he would not have battled rising premiums, but would have had permanently reduced the amount available to invest for 29 years.

Either way, the total net return on a "buy term and invest the difference" strategy would have pushed the total return (i.e. the "internal rate of return") even lower than what was presented above, since the part of the total outlay for "buy term, invest the difference" goes to pay for term insurance premiums, which have an effective -100% return. For example, if the policyholder had a choice of paying whole life premiums of $1,000 or buying term insurance for $100 and investing $900, the total return calculated on the $1,000 total outlay for "buy term, invest the difference," is dragged down — significantly — by the fact that $100 of that $1,000 is a total loss. And that loss keeps rising in an annually renewable policy. The policyholder's premium might have started at $100, but would increase each year.

It's only when critics ignore the impact of taxes, investment fees, and the cost of term life insurance, does an indexed or managed mutual fund look more attractive than the whole life insurance policy, at least historically-speaking. Looking back into the past, we know the facts. In this instance, the policyholder was much better off buying the Northwestern Mutual policy.

What About Other Time Periods and Other Companies?

MassMutual and the Guardian have both done comprehensive long-term historical dividend studies on their whole life insurance products, each company using different start dates for their policies. MassMutual has, perhaps, the most comprehensive study to date, showing the actual long-term return on various whole life products for both males and females of various ages.

The 40-year return for all the policies studied fall within a tight range. For example, a policy purchased by a 45-year-old male 40 years ago has had an actual 40-year compound annual return of 4.80%. The policy was originally projected to return just 3.13%.

A 35-year old female who purchased a whole life policy 40 years ago has earned a 40-year compound annual return of 5.86%. Her policy was projected to earn just 4.74%.

And, a 50-year-old male who purchased a policy 40 years ago has had a 40-year compound annual return of 5.89%. His policy was projected to return just 4.05%.

What's surprising about this should not be — that a solid mutual life insurer like MassMutual can potentially return 88% more than it originally projected. It demonstrates, once again, how valuable whole life insurance can be.

Do Investors Need to Take Market Risk to Achieve Financial Security?

Jim Dahle tells us elsewhere on his blog:

"There are real consequences at stake when you decide to take less market risk." (

Dahle isn't alone in his view. Numerous articles on the Internet — too numerous to count — imply or explicitly state, that taking investment risk is necessary for financial security.

But, is it?

Both index fund and managed fund investors have taken significant market risk for the last 20-30 years, and yet many of them have not been compensated for that risk.

At best, the after-tax return, net of investment management fees, of regular contributions to AIVSX, VFINX, or VUSTX plus a matching term life insurance policy have historically matched the returns that a policyholder of a good dividend-paying whole life insurance policy received during the time periods measured. The only difference was risk. Whole life insurance cash values are guaranteed, and once dividends are earned and used to buy paid-up additional insurance, they become part of the guaranteed cash value. Investors holding securities are never guaranteed anything at any time.

Said another way, $1 million of whole life cash value has the same exact value as $1 million held in VFINX, VUSTX, or AIVSX but… compared to a whole life policyholder, investors in those mutual funds have historically shouldered substantially more risk. But, for what reason? An investor should be compensated for risks they take. But, if they historically did no better than a strong participating whole life insurance policy, what was the point of investing for all those years?

The bottom line is whole life insurance policyholders took little or no risk to achieve their returns, they were protected by life insurance the entire time, and they lost nothing along the way since cash values are guaranteed to grow each and every year inside of a whole life policy. Meanwhile, investors took significant risks and have had numerous setbacks that they've had to overcome.

Do You Need Life Insurance After You Retire?

According to a November 2018 article on Suze Orman's website:

"You likely only need life insurance for a certain number of years. For example, until the kids are grown. Or until you have accumulated other savings that can support your family… Unless you have a permanent need for life insurance—such as a special needs child—term insurance is the better deal for you."

Buried in that statement by Orman is its own contradiction. When Orman suggests term life insurance is a better deal for consumers — no, it's the opposite. There are no deals in the life insurance industry. All premiums for all policies — regardless of whether they are term or permanent policies — reflect the actuarially fair cost of insuring against the probability of death… a probability that is universally applied across all ages.

That everyone dies is obvious, which is what make's Orman's statement all the more absurd. She can't, herself, truly believe that life insurance is a temporary need as much as it's a universal permanent want. Simple addition proves this point.

Whole life insurance provides a death benefit which is, always and everywhere, more than the total premiums paid for the policy since premiums are collected by the insurance company and then applied to the cash surrender value, over time and with interest. Said another way, regardless of whether you buy a $10,000 or a $1 million whole life policy, the total lifetime premiums you pay will never, ever, equal the death benefit of the policy. They will never do so because of the much-vilified guaranteed cash value portion of the policy, which, once again, reduces the amount of insurance being purchased in the policy and includes interest paid on said premiums.

If Orman's assertion is to be believed, then it would make more sense to pay for final expenses (not to mention leave an estate for one's heirs) by paying $1 out of one's own savings for every $1 of inheritance left to heirs, instead of paying $1 in whole life premiums and receiving more than $1 in total death benefits. In other words, if one dies only with one's savings, that's as much as one can ever possibly leave to heirs. However, if one dies with whole life insurance, one can leave savings plus an additional amount of insurance — the net amount at risk.

Once again, the death benefit of whole life is comprised of a combination of net amount at risk (insurance) and the accumulated cash surrender value of the policy (savings). All other things being equal, it's literally impossible to leave more money to heirs without insurance than with.

The Unwritten Argument Against Whole Life Insurance Undoes Itself

In May of 1986, Arthur Williams, the famed high school football coach-turned life insurance agent, and the man who is single-handedly responsible for the modern "buy term, invest the difference" movement, was interviewed by the New York Times. In that interview, he lamented that, "The life insurance industry has ripped off the public by complicating what is really a simple business — protection of the family breadwinner."

Williams, and his intellectual predecessor, Norman Dacey, believed that life insurance was a temporary need, at best. They also believed buying term life insurance and investing in the stock market would always yield better results because of some inherent flaw embedded in the nature the whole life insurance policy.

Sad is the fact that Williams and Dacey were wrong, and that hindsight is 20/20. But, it also exposes an important lesson everyone can learn. The reason people buy whole life insurance is because, as much as we all want to possess Cassandra's secret, no one can predict the future. Critics of whole life insurance love to talk about the long-term average of the stock market.

Usually, they'll cite some return like 8% or maybe even 12%. The reality is, investors never earn the long-term average. They earn a return based on stock and bond valuations unique to the time period they're investing in. And the time period they happen to be investing in is based on when they were born — it's completely outside their control.

For example, if an investor could have invested a lump sum of money directly in the S&P500 index from 1923 to 1953, he would have seen his investment grow by 3.38% per year for those 30 years (not including taxes and investment fees). If he reinvested dividends received during this time period (which would have been very difficult due to the way financial markets worked at that time), his maximum theoretical return would have been about 9%, before investment fees and taxes.

However, if someone like myself, who graduated from high school in 1997, saved up some money for a couple years and then invested a lump sum of money in the S&P500 index in 1999, and held it until the end of 2018, that someone would have seen a theoretical maximum annual compound return of just 5.59%, with dividends reinvested, before taxes and investment fees. He would have seen a more realistic return of about 4.5%, net of fees and taxes.

When critics talk about the long-term average, they're talking about a fantasy that doesn't exist. Averages change over time, which creates uncertainty about future returns. And, while some investors and financial experts like to pretend that equity risk isn't real and doesn't matter in the long-run, the reality is equity risk always matters in the long-run.

The sad truth is most people will not achieve financial security by taking unreasonable investment risks with money they cannot afford to lose. And, that is the somewhat painful and obvious point in all this. Millions of people do take risks they cannot afford to take, and they do lose money they cannot afford to lose.

The solution to this problem hasn't changed in over 200 years. Whole life insurance creates a future guaranteed savings. It creates certainty out of uncertainty. It solves the eternal problem of predicting one's financial future. The fact that no one can predict the future is obvious, which is why the arguments proffered by whole life insurance critics collapse under their own weight. It is also why the fundamental argument for whole life insurance is, ultimately, unassailable.

The moment you can predict the future, you don't need life insurance. But, that is not the world we live in, and the critics know it… even if they won't admit it.

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David Lewis is the founder and owner of Monegenix. He designs insurance-based financial plans, financial calculators and apps for business owners and professionals.

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