Outrageous Claims of Whole Life Insurance Agents

Whole Life Insurance has been around a long time.  However what was once a well oiled machine seems extremely dated by today's financial standards.  It has been said, by many, that Whole Life Insurance is Sold and Term Life Insurance is bought.  There is a reason for this...

But in order to buy term life insurance, you may need to sidestep some of these claims:

Does that sound like a great investment idea to you? The average rate of return with whole life policies of course is just the half of it. Investing in whole life is really an investment in a two sided contract where both you, the insured, and the insurance company each have duties. One of your duties is to pay your yearly premium, on time, each and every year. Failure to do so, will have serious repercussions.

One would assume that as you make your payments your "Cash Balance" would go up.  However, that is not how it works.  In general for the first couple of years, much of your initial payments go to paying for marketing and sales expenses.  In fact you might not have any cash balance for up to three years, perhaps longer.   Even when the "cash balance" does start it is usually a paltry couple of dollars per year in the beginning.  Only after 8,9,10 years or so will you notice the cash account accumulating any reasonable amount of money.  Only at about year 10 will the dividends start to be a reasonable amount of money.

Depending on the Insuring company and the contract that you purchase you may not see the cash balance outpacing a Term and Bank Invested 'Rest' account for somewhere between 12-14 years.   There are many reasons for this.  One of these reasons is that dividends on whole life insurance policies are only paid out the accumulated amount that you have in your cash account, not the total amount of premiums paid out.  Another reason is the above mentioned marketing and sales related expenses.

The confusion that exists about dividends being paid out only on the cash value portion of your whole life policy with potential negative subtractions taken out for money on loan is one of the primary reasons, in my opinion, that so many people cancel their whole life insurance policies in the first ten years.​

Whole life insurance functions nothing like a traditional savings account nor even like an investment account.​

A Typical Whole Life Policy "Cash Account" vs a Straight Bank Account first three years:​

After three years, you can either have $28,455 in a bank or $7.060 in a Cash Account on your Whole Life Insurance policy.   There are of course numerous issues with this overly simple comparison.  It does not include the cost for a $1MM term life policy.   And it is only considering the first three years.   However, we are also ignoring the interest from the bank account and the additional safety of socking away your own money in your own account.

By the way - a $1MM - 20 year, plan super preferred, could be had for as low as $424 per year.​

Second, we are not attorneys.  Likely neither is your insurance agent though, so there is a limit to how much we or any insurance agent can advise you on this.   So - see an attorney if you want to buy life insurance with the thought that you may be able to declare bankruptcy and keep your life insurance cash value.

Third, getting back to the claim that life insurance money saved is an asset protected model.   Being that the individual states set laws in regards to caps of bankruptcy exclusions, you should at least consult a list such as 50 State Creditor Exemption Rules, here is one from a Law Firm Duggan and Bertsch.  Or at least potentially your insurance agent selling you this claim should show you this.

If you merely look at the first two states you will see how all over the map the different states consider life insurance cash accounts.​  Alabama (AL) allows for "100% for insurance on self or spouse payable to self, spouse, or children."  It makes no mention of cash value.  

Alaska (AK) states "Up to Wage Exemption if beneficiary is insured's spouse or dependent."  Alaska's whole life insurance exemption does not sounds that generous to me.  Nor does it seem to mention cash value.

Arkansas (AR) states pretty clearly "Same as life insurance cash value."  Arkansas exclusion seems to more clearly fit the claim made by national whole life insurance agents.  However, there is even an issue with the wording on this one.  If the cash value is lower than the death benefit, which it is often is, does that mean that you are only protected up to the Cash Value and not the entire death benefit amount?

I do not know. As I have stated, I am not an attorney.  But I am not claiming to you that whole life insurance is a creditor protected savings account.  There seems to me enough ambiguity to me that I would never consider buying a policy for this reason without meeting with an attorney first and foremost.

The next major issue is the difference between Criminal and Civil forfeitures.  Criminal cases involve an illegal activity, typically someone that knowingly commits a crime or allows a crime to happen. Well meaning whole life insurance agents, may not be considering this when they tell you that "Yes Mam, your whole life insurance policy will be asset protected in court." Does this insurance agent really believe that modern RICO laws will somehow prevent the federal government from seeking assets from a convicted drug dealer?  Really?

Money that has come from "questionable sources" can be considered tainted and essentially frozen by the federal government.   The Law Firm Gallet, Dreyer, and Berkey, LP's opinion of this in regards to funds received from Bernie Madoff scandal, titled: If You've Received Madoff Funds, Can You Protect Them? is very telling.   Their potential suggestion is that "reasonable and equally effective strategy would be to purchase a foreign annuity or life insurance policy. "  Notice the word foreign, as not located in the United States. However, "As noted above, such policies are normally exempt, but are vulnerable to a fraudulent conveyance claim. However, if the policy is issued by a foreign company, and assets are wired offshore to that company, those assets would be outside the jurisdiction of the U.S. court system, and beyond the reach of the trustee."

First off they are not discussing the people that perpetrated the crime, but people's whose money came from a crime, essentially innocent people who unfortunately received 'tainted' money.

Second, they are suggesting that in order to even consider trying to protect this money that it needs to be wired to a foreign country and then be put into a whole life insurance product.

Another major issue  is the situation when you owe the federal or maybe even the state government money.  Perhaps for missed income tax payments or even property taxes.   As a general rule of thumb, the one group of people that you do not want to miss payments with is the government. A well written article, titled "When the IRS Wants Your Life Insurance Policy" should be required reading for all insurance agents, in my opinion. 

In just one section, titled: Federal Tax Lien, the article states: "Section 6321 of the Internal Revenue Code imposes a tax lien “upon all property and rights to property, whether real or personal,” belonging to a taxpayer, if he or she neglects or refuses to pay any taxes, including cash surrender values of insurance policies. " 

"The lien arises when an assessment is made (IRC Section 6322) and even attaches to after-acquired property. Section 6334 exempts several classes of property from the government’s tax levy and provides that property not listed is exempt may be levied. The cash values of life insurance are not specified as exempt property, and are maybe subject to a levy."

But this article contains Five More potential reasons that the IRS could come calling for Your So Called Asset Protected  Insurance Policy, such as: Government Collection Methods, When a Lien Attaches to a Property, Right to Disability Payments, Right to Annuities, Spousal Liability, Right to Income Taxes From Death Proceeds When the Government Has a Lien, and Right to Income Taxes From Death Proceeds When the Government Has No Lien.

Lastly, even if the asset protection model was appropriate for you, would the lower returns of money placed in a cash value insurance policy warrant giving up higher returns in say a market investment account?

If you are merely looking for methods to hide monies from the federal government surely paying down or even paying off your house may make more sense, depending, of course on which state that you live in.   Some states allow for 100% of the value of your home for potential asset protection. Other states have very little at all.

For that matter, if your goal is just to hide money for asset protection methods - why not just spend the money?  Money spent will also not be able to be seized by authorities.​  And buying whole life insurance for this method is pretty similar to just spending the money anyways if you think about it.

A lifetime term is really a Guaranteed No Lapse Universal Policy.  A type of policy that potentially costs half as much as a completing whole life insurance policy.

The guaranteed universal no lapse policy carries no cash value.  So some have taken to calling it a term policy with a lifetime of coverage.  Universal life insurance is extremely complicated - so even with this form of insurance - I would advise you be very careful.

But do you...need life insurance forever?

The second counter argument to this ridiculous claim, is assuming that one needs life insurance for their whole life.  Since the point of purchasing life insurance is to help loved ones left behind with their financial needs, Why would someone need life insurance when their kids are grown up out of the house and their own financial house is in order?  Do you need life insurance during retirement?  Do you think its cheap to have it during non working years?

Roughly assuming that whole life insurance is about 8 to 12 times the cost of a comparable 20 year term policy, the left over money NOT SPENT on a whole life policy allows the insured to save a huge amount of money in 401Ks, Roths, HSAs, Saving Accounts, and by paying down their mortgage early.

I have often wondered how the typical life insurance agent comes to recommending a whole life insurance policy to the typical american?​  Would not the insurance agent have to know your income, your expenses, your balance sheet, your properties, liabilities, all of your other insurances, short term and long term savings, and investments, plus all of your retirement information such as qualified accounts such as 401Ks and Roth IRAs in addition to pension information?  Wouldn't they have to know all of this information before being able to consul someone of their need to have life insurance forever?

However, many life insurance agents just make the blanket statement that everyone needs life insurance forever.  I question that concept.

​Education Savings Accounts and 529 plans are both great places to save for college.  Whole vs Term makes no recommendation between the two.  However given the income limits for ESAs, we will focus just on the benefits of 529 plans.

How can I be so sure that money saved in a 529 plan is better than Whole Life.  The numbers.  Money saved in a 529 plan grow tax free as long as they are used for approved college expenses.  Money saved in a whole life plan, must first get over the 12-14 year period that we discussed before it gets to par with a bank account, however then you need to understand how you would access the money?

This is the precise question that I suggest you force your whole life insurance agent to answer.  How do I access my savings for my children's college?  Ask them to chart it out.  Explain the fees, the loan costs, etc.

Next, it is mostly true that money that is squirreled away in your Life Insurance Contract will not count against you with the FASB rules. At least how they are currently written.  However, if that is your goal, then you really should explore all of your options.​  So what other methods of saving do not count against you?

The simplest and least complex, is of course the very place you may be reading this = your house.  By paying down your mortgage you are in essence shielding the money in a FASB shielded way from public universities.  (It may also be a form of asset protection depending on your state and the value of your home.)  Private universities may be slightly different.  By shoving extra money into you mortgage payment you are guarantying yourself a return of at least what your mortgage rates is.  If one were to need to pull the money out, its possible you could do a mortgage where by you take money out of your home.  Yes, there will be fees and you will need to pay interest.  But how exactly is that different than saving the money a whole life policy?

​The last major point that I would suggest you consider is how much your extra savings will swing your FASB application.  In other words does it really matter if I have $100K in a Savings Account vs $80K in a Whole Life account?

As with all of these wild whole life insurance claims, I'd suggest that you fill out a FASB form yourself and calculate the difference.  If this sounds like too  much work for you, I would just give up on the whole life option.

There are other retirement savings accounts such as 403Bs, Roth 401Ks, etc.  But both the Roth IRA and the 401K will suffice to be the major impediment to this so called claim by whole life insurance agents.

How can you beat an account that is allowed to grow tax free for retirement?​  Does a Whole Life Inurance Policy allow your money to grow tax free for retirement?  Nope.

How can you beat an account that is allowed to grow tax deferred?  Are whole life insurance accounts allowed to grown with tax deferred earned income from work?  Nope.

Technically speaking a Whole Life policy allows your money to potentially grow tax free for your beneficiaries, but NOT for your retirement.   In order for it to grow tax free for retirement you would need to "access it."  There is precisely where the issue is.​

How whole life savings work?

Some of the smarter life insurance agents that I have spoken with will say that indeed whole life insurance does not compare with 401Ks and Roth IRAs. Kudos to those agents, because I believe that that is true.  However acknowledging this puts the argument of why whole life is good for retirement into a bit of a pickle.  If 401Ks and Roth IRAs are indeed the best retirement vehicles then clients would need to fully fund both of these before even considering whole life for "retirement" savings.  For tax year 2017, the maximum allowable amount that a contributor may put into their 401K is $18,000.  When two are working you are talking about $36,000 before any employer matches.   Lets just round this up with an assumed dual employer match of $2K each to $40,000.  Then you consider either a Roth IRA contribution or a backdoor IRA or a non deducible deposits of $5,500 each for a total IRA amount of $11,000.   When you add up these two numbers that is a staggering $51,000 per year!

In other words setting money aside for retirement in a whole life insurance policy would require some to be saving over $50,000 per year - BEFORE they consider putting money into the whole life plan - WOW.

The discussion from there goes on to where are next best places to save for retirement?  Your home, a mutual fund account?  

But where else can one save money for retirement?   My opinion is it is really depends on your situation. Paying down your home, perhaps a rental property, municipal bond funds, or by setting the money aside in a low cost, low taxed ETF.   Speak with a fee for service advisor.

A dizzying array of options it most certainly is.   But how can insurance agent who is not already somehow managing your money know if you really should invest for retirement in a cash value life insurance plan?

Are those the most outrageous claims by Whole Life Insurance Agents? Possibly not, perhaps they are the most common claims. They are certainly claims that we believe to be mostly not correct.

How to Protect Yourself Against Outrageous Life Insurance Claims:

What to do with all of this information?   If you are seriously considering purchasing a whole life insurance policy, I would thoroughly do your own homework. Run your home numbers with your own set of assumptions.  Don't believe the hype about whole life. When in doubt find out if your qualify for level term life insurance.  I would go so far as to suggest that you should even check up on what I have said, I could be wrong.  If I am wrong, please prove it to me!

Outrageous Claims of Whole Life Insurance Agents:

Thanks for reading the Whole Vs Term article about ridiculous sales statements made about whole life insurance, titled Outrageous Claims of Whole Life Insurance Agents.   For the record, these statements tend to be made a minority of insurance agents.   I hope you have enjoyed this long form article and learned enough to make a well informed life insurance decision.

About this Article:

This article about miss-selling and misleading statements has been a long time coming.  To be fair some of the ideas and concepts about many uses of life insurance start with a basic fact.  However that basic fact can be misused and twisted to turn it into something that it was never intended to be.

I believe to this day that Whole Life Insurance is a very valuable tool for some Americans. (This is often high net-worth families.) But the people that are buying these products need to understand what it can and can not do well. There is a very small sub set of consumers that would do well to consider buying an affordable whole life insurance policy.