April 24, 2024 • 28 mins
In this episode, Wes and Tyler debunk myths surrounding permanent life insurance, specifically whole life policies. They tackle misconceptions about using whole life as a retirement investment, the misleading nature of insurance projections, tax implications, and the myth of utilizing whole life for long-term care benefits.
If you're not already, subscribe to The McGill Advisory newsletter to keep up with all the articles mentioned in our episodes, as well as a plethora of other content. Use code Podcast20 for 20% off!
mcgilladvisory.com
Listen to our sister show, Next Gen DDS! An all-in-one resource for dental students, residents, and early career doctors, discussing both clinical and business aspects of dentistry, hosted by Wes Lyon and Dr. Scott Menaker.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:02):
Welcome back to another episode of Drilling It
Down this is your co-host Wes Lyon and
with me in chair number two today is tyler rott ty welcome to the show thanks
for having me always excited so this is going to be our first youtube podcast
that's exciting i mean we got this whole new setup so it's going to look real
(00:22):
nice if anyone has tips for lighting let us know oh you know we're We're on
a little bit of a makeshift studio,
but we've got some camera angles here and we're working on it.
Yeah, I think it's going to look great.
But no, well, today we're here to talk about top myths of permanent life insurance.
And today we're specifically going to talk about whole life.
We might do a whole nother episode on universal index life, or is it index universal life? Which one?
(00:50):
I mean, I think I've seen it both ways. They like to make it as confusing as
possible. Yeah, I find it hilarious.
Sometimes I'm on LinkedIn trying to find, you know, hey, need some talent,
try not to pay the recruiter.
And I found this one guy where I don't know, apparently he owns a company,
but all he does is go to all the life insurance salespeople and just comments
(01:11):
hilarious things underneath their whole life insurance sales.
So it's at least a good laugh.
And he's one of the only people I follow. So it gives me a good chuckle every time I pull it up.
But we gathered our top seven from him and a couple other sources we have here.
So, Tyler, what's your number one myth on permanent insurance?
I think the number one myth is that it's really a good investment. Yeah.
(01:36):
People think that it's the best way to prepare for retirement,
to grow their net worth, and really it isn't.
I think it's unfortunately due to the projections that are presented to them
and how it's sold to them.
Most of these doctors are getting their information from, unfortunately,
their friends. One of their friends turned out to be an insurance broker.
(01:57):
And so I think it's in the first day of training, they say, hey,
do you have any lawyer friends, doctor friends? you should reach out to them,
sell them some life insurance.
They need it. So they reach out to their doctor friends. They say,
look, whole life insurance is what you need.
Little do they tell you that you sign up for whole life insurance.
They get a nice fat commission check on it.
(02:18):
No, definitely. And you mentioned something in their projections.
Walk me through what you mean on the projections. And you have any examples you can share?
I mean, we've been seeing this lately, But I don't know for the viewers and
listeners out there, they quite understand what the word projection means,
(02:38):
because I don't think the insurance salespeople present it as a projection.
I think, I mean, from your experience, they present a projection or they present
here's what's going to happen. in.
They almost present it as a guarantee and they kind of gloss over the word projection.
And what I'm talking about here is, you know, they'll give you a pamphlet of
about 50 pages and a few of these pages are going to have tables of projected
(03:03):
premiums, insurance costs.
And I think the word they use is illustration.
We like the word projection because it makes a little bit more sense,
but I think they call it an illustration if you're ever looking at one of these.
That's exactly right. It does. I mean, it completely removes projection out
of that picture. It's saying, illustrate, this is what you're going to see.
It's definitely, they choose that language for a reason. But when it comes down
(03:26):
to it, these illustrations are projections.
And it's going to project, it's going to show you, you know,
what they want you to see, which is your premiums going in, the insurance costs
going down, and your cash value going up too.
Where it should be at the end of the term. The issue there is these growth rates
of the cash value, of the surrender value, of the death benefit are going up
(03:50):
at, most of the time, unreasonable amounts.
I saw a projection from one of my clients where they were getting it for 8%
return year over year, and that's after fees.
That's something you need to understand on this is all these illustrations,
the returns on this cash value is after fees.
So to get an 8% return after fees, you need above 10%, above 15%,
(04:15):
really, in some of these, you know, high fee products.
So it's just a lot of unreasonable returns.
I even saw one was 12% after fees. So yeah, that one we were looking at,
too, we couldn't back into the math on it.
Because, you know, the illustration was showing 6% annualized,
but we did the math and said, hey, if you just had zero fees and made 6%,
(04:36):
what would your money grow to?
And I mean, we just couldn't figure it out. But then I want to step further.
And this is very, very important to note for everyone, because the way a whole
life insurance policy works, it's based off some index.
And sometimes it can be the S&P 500, and it will have a cap on it.
Now, Now, they're guaranteeing a floor on the policy, right?
(05:00):
Now we say the policy is not going to go down. So putting a cap on the upside,
okay, I totally get that.
However, a lot of times they create indices.
So one of them we were looking at and it said, hey, you're going to get 6% annualized.
This is the actual performance of this index I'm recommending that you invest
in over the last 25 years.
(05:22):
And then we look and that index was created by somebody three years ago.
I mean, it's like, well, yeah, if we could go back in time and predict things
25 years ago, I would have told you to put all of your portfolio in Apple.
Yeah, Netflix, Google, Amazon.
I mean, and just would have made a killing. But, you know, you can't say,
hey, look, after the fact, if we would have done X, Y, and Z,
(05:45):
look how your policy would have performed.
You know, in our world, they make us do something, not really the consulting
world, but in the investment world,
they make you do something that is, you know, past performance is not guaranteed
or is it indicative of future results to just basically tell you that, hey,
this did this in the past.
(06:06):
It has zero bearing on what this will do in the future.
But they get a lot of people on these projections or illustrations.
And then, Tyler, have you seen, if you dig in the back, I think they're required
to show you the illustration with the minimum guaranteed value.
Yeah, and those come to around 1% to 2% when you back into the numbers there.
(06:27):
And that's not the one that they harp on when they're selling you the product.
They're saying, hey, you're going to get 8% return on your investment if you do this.
Guarantee is only about 1%. No, so we haven't seen any of them perform.
I mean, we've had people come in here that they put 1.4 million into them and
(06:48):
they're only worth 1.2 million.
And then to make it worse, they owe taxes on the money. So that might get into
our next myth that these are a tax shelter.
So Ty, what are they typically selling when they sell these things for tax-wise, is it?
So they say that you put in your money, you can get it out tax-free.
(07:10):
Little do they tell you that you're taking a loan against the policy.
So that loan incurs interest, additional fees on the policy,
reducing your dividends.
Also, they don't tell you that should the policy not perform,
should the policy terminate, all those loans that are tax-free before are fully
(07:30):
taxable at ordinary income.
At ordinary income rates. Exactly. So you're paying 40% state,
federal, even higher depending upon where you live, what your income is.
And for the listeners out there, I think the comparison they're always making
is this is tax-free. And if you get into a brokerage account, it's not.
However, most of our clients in retirement pay long-term capital gains at 15%
(07:53):
to 20%. So you're potentially doubling the tax rate on the policy. Yeah.
And that's capital gains as well. You also have basis in your investments too.
So, you know, you're not paying full tax on your sale. Now, you do get basis in the policies.
However, I think what people don't realize is what's different.
If you put the money into the S&P 500, you put a million dollars in over 20
(08:16):
years, your basis is a million dollars, right? Pretty plain and simple.
Where people get tripped up is you put a million dollars into a whole life policy.
Well, they take all their fees out, all the cost of insurance, all of that comes out.
Before they calculate your basis.
So you put a million in, you might only have a tax basis of 600,000.
So that's how you lose money and still pay tax.
(08:38):
Yeah. And that's even if your cash value is where it should be.
Let's say, you know, you put in a million, your basis is about 900,000.
Oh, little do you know, your cash value is about 950,000. You still end up paying
tax on that difference there.
We were talking about this in the monthly Drilling It Down too is,
you know, okay, what's the likelihood?
(09:00):
They're showing you all these things, but what's the likelihood that my policy doesn't perform?
Pretty darn likely. In 1979, the government set out to do a study on how bad
these policies were or good.
And they found out that most policies only returned one to 2% annualized,
and they're charging more than that on fees.
(09:20):
I mean, it's a high likelihood you're going to end up getting smoked on one of these policies.
And I think part of that comes down to who, you know, insurance companies aren't
any better investors than, you know, low-cost indexes, low-cost mutual funds.
In fact, they're worse investors, really.
So you're paying these premiums, you're paying these fees for a product that
(09:41):
really isn't going to return you what you could do on your own with,
you know, a Vanguard low-cost full market ETF or mutual fund.
Now, that kind of brings me, and I'm going out of order here,
but it kind of brings me But, you know, in a whole life policy,
Tyler, if I recall correctly, but this gets a guaranteed amount to your kids.
(10:02):
A guaranteed amount, yes, in the form of a death benefit and cash value. Do you get both?
Oh, no. There are going to be some upset life insurance agents when they hear this.
No, I don't think most people know that. We tell this to everybody that has
one, and for those of you out there who don't feel bad, almost every doctor
(10:23):
gets swindled on one of these in their lifetime.
So they usually come in as part of our tax and business planning program,
and we have to go through it and tell them.
And it's always, we go through these things, and I think most people don't quite
grasp. It's kind of like us trying to learn how to do a root canal.
Don't know what you're talking about. Great, but I don't have the baseline. line.
(10:45):
And I think a lot of people don't quite understand how impactful the fees can
be, the cost of insurance, all this stuff we're talking about.
But the second we tell them, by the way, do you know your kids are only going
to get the death benefit and not the death benefit and the cash value?
And that seems to throw everyone for a curveball. If you have a half million
dollar cash value and a million dollar death benefit and you pass away,
(11:06):
your kids get $1 million, not $1.5 million.
So you don't receive both of them. The other thing is.
You know, you put a million dollars into this thing and they perform according
to the government study, which we don't have any more recent studies because
there's no uniform requirements to report this performance, which is just insane.
(11:28):
But the insurance money or insurance companies spend a lot of money lobbying.
So we don't have anything. I will tell you from our experience of seeing probably
five of these a month on average, those numbers from 1979 still hold true.
They're about one to two percent performance wise on average.
Now, the insurance companies will calculate performance however they like.
(11:50):
I like to just look at, hey, they're selling it as an investment.
They're not selling it as life insurance.
So how much money do you put in? How much can you get out? That's very simple math.
The study we actually referenced, though, that went a little bit further and
said, what would the cost of insurance be in term?
So let's take out the cost of insurance, and they still only get 1% to 2% on
(12:10):
that. But okay, you've got this guaranteed amount.
But if you just invested it and you made 6% over the long run instead of 2%,
or let's say 7%, because I think the rule of 10, your money doubles every 7% doubles every 10 years.
So at 2%, your money is going to double, I don't know, once in 40 years.
(12:32):
And at 7%, it's going to double every 10 years.
Your kids are going to have a whole lot more money, although not guaranteed.
They're going to have a whole lot more money if you just don't get in bed with an insurance company.
Yeah. Or if you are in bed, you get term insurance investment count on the side.
Term insurance, we've mentioned it, is the best cost benefit for the amount
(12:55):
of insurance you receive for the premium cost there.
There is fees associated with investing, your expense ratios and all that,
but they are much, much lower than the insurance costs and the other fees associated
with permanent life insurance.
Oh, absolutely. So most people, that kind of brings up a good point before we get to the next myth.
What is whole life insurance, Tyler? If you could describe it in very simple
(13:19):
terms to somebody of, hey, what are you actually getting when you purchase this?
So simply, simply think of a box.
You got a cardboard box here that you're going to mail a package to somebody
and you're going to fill it in with a few things that you want to ship to somebody.
So first part of this whole life policy is the insurance.
What that insurance is, is a term policy. So you take your term policy, you put that in the box.
(13:43):
Next thing is we got this cash value. So how are we going to build up our cash value?
We have an investment account. So we have our cash value. We have our investment
account. We have our term insurance in our box.
But if you shake that box around, those things move. So we can't ship it to our friends.
Otherwise, it's going to get damaged. So what we got to do, we got to put all
those little packing peanuts, those plastic airbags.
(14:04):
You know what those plastic airbags and packing peanuts are, Wes?
What? Those are fees. Fees. You shove enough fees in there, that investment
product and that investment account, that term policy don't move around.
And that's again, where all that return goes, all those fees take all that investment return away.
Yeah. I'd almost equate it to, let's say you've got like a box big enough to
(14:26):
put a mattress in it and there's just two shoe boxes in the box and then the peanuts are the fees.
So we have to load the whole thing up to not damage the rest and not have everyone
to figure out that actually inside this box are separate components.
But no, that one right there, I always tell people, it's just all those fees.
(14:46):
It's going to get you. And the reason this gets sold, as you had mentioned before,
is a lot of the times the sales charge on the front end can be 40 to 100% of the first year premium.
So they'll convince you to start this thing with $100,000.
And they'll forget to mention to you that they're putting $50,000 in their own
pocket for you buying this policy.
(15:06):
There's a huge financial incentive for insurance agents to sell you whole life,
permanent life insurance over term. Term, you're not going to make as much.
Yeah. So another favorite one of mine, and sometimes I overlook this because
we work in this world, so we know not to do it.
(15:27):
But some people do get called up. They see things on social media and infinite
banking or rich people do this. So you should do it, too.
I mean, Tyler, is that just a scam? No, I mean, it's not. It's it's true.
The ultra wealthy do take advantage of some of these strategies.
(15:49):
But the reason they do it is they've taken advantage of all the other tax advantage
strategies before this.
They have so much money. They don't know what to do with it.
Now, I'm going to get an argument here with you.
I think that's incorrect. Okay. I think they do it because they've also been
swindled. Probably. Probably.
There's better ways to pass money. Because I know in my first role,
(16:15):
we were working with some pretty ultra high net worth people.
Back when I wasn't solely dentistry. To try to protect, I won't say anything
to give away, but one was like an American dynasty family that we had.
I mean, when this man rolled to the door, his security rolled to the door.
His kids and grandkids would call me, but the man himself, absolutely not.
(16:38):
He rolled right into the managing partner's office, didn't say hi to the front
desk, security out the wazoo coming up.
And I can guarantee you that man had zero whole life insurance policies.
We helped him solve his estate tax issue, and you really didn't need to get
one. We had another one, a famous musician, but not pop music,
(16:58):
more of like classical stuff.
And, you know, I don't think that that pays that well. So I think she'd inherited the money.
However, again, zero, zero whole life insurance on this.
So I haven't run into it with anybody ultra wealthy. I can name a few people
(17:19):
off the top of my head that have gotten swindled into this that I think are
in the 60 to 80 million dollar range.
And when they told me about it immediately, each time my first gut instinct
went, there's an easier vehicle or a cheaper way you could have done this.
You know, you can't save them all. So I tend to think that that's a little bit
(17:41):
of a scam. I will admit that some wealthy people do it. I've met them.
However, most of your ultra wealthy people aren't doing it. I'd even take that
a step further. I had this question the other day.
Somebody called me. It wasn't to do with life insurance. I think it was to do
with running a commercial real estate conglomerate. And he asked,
well, of the top doctors that you have or that you've seen that have really
(18:04):
made it financially, what have they done?
And I said, well, top of my head, I can name five or 10 and they've all done the same thing.
Low cost investments and they just saved a lot and they've used the time value
of money to their advantage.
There's no, I don't think there's some secret out there for how people get wealthy.
They just save more than they spend.
(18:26):
Get it auto drafted in. Dollar cost average, no better way to do it, really.
You spend, any excess goes into savings, and you just don't even think about
it. It's the best way to grow your net worth.
Well, another myth I have here is it allows you to spend down other assets because
you know your kids will get this.
(18:47):
Is that true? I mean, not really. Again, you're paying these premiums every month.
That's bringing down your monthly cash flow. You're spending down your other assets.
It's not the best thing. Again, they're only going to receive the death benefit.
It's just a lot of these...
(19:08):
Promises are really oversold. If you need money in retirement,
do you look for an annuity instead as a way to guarantee funds for you?
It's not the best way. And if you're really looking to pass money down to your
kids, there are better ways and other ways to pass them down tax-free.
I mean, you could always just make a gift of the premium each year instead of
(19:33):
the premium, though, and get it in a brokerage account in their name and let it grow.
Absolutely. There's lots of ways to do this that don't involve whole life insurance.
Back in the day, this is my rule. I don't know if you've ever heard the story
of why I have this rule, but I will not talk to your financial advisor.
I will talk to your CPA if we're working together. I will not talk to your financial advisor.
(19:55):
Made this mistake. This guy had shown one of these illustrations,
and my client thought she was
set to retire, had put like $115,000 into a whole life insurance policy.
And he had some illustration where this $115,000 turned into $10,000 a month, which was absurd.
So he wanted to have a call with me. And the first thing out of his mouth,
(20:15):
and this client thought she was going to retire, and she wasn't.
And we had to go in there and redo everything, and she had to work for another four or five years.
I mean, it was ugly. Fortunately, we were able to fix it, and she got out on
time. But she wasn't even close to retirement when she came to see us.
I mean, I think she had a net worth of like $700,000. dollars
like it didn't take a genius to figure out this wasn't going to work
(20:36):
but first thing he says was well have you even thought about
her legacy planning goals i sat there i started
yelling at them i'm like who cares about legacy planning she doesn't have enough
money for herself i don't care about her kids yeah like if we can solve enough
money for herself we'll care about her kids secondary and it's just a sales
tactic that they use to sell this nonsense and that they they sell
(21:00):
a lot of this for estate planning purposes and reducing taxes after death.
You know, majority of our clients don't have that issue where they won't pay
estate taxes, um, cause their estates not large enough.
You know, some may have estates that, you know, we need to do some planning
on to reduce the estate taxes and a stack burden, uh, tax burden there,
(21:20):
but we're not going to use whole life to do it.
No, that one's a, everyone always freaks out over the estate tax,
but I can tell you from like a family standpoint,
I remember everyone in my family we call me freaking out my grandmother
passes away oh what have we done they're gonna look at
us and what about these gifts she's given us we don't
know if she reported them and i said that i'm like she's only
got three million dollars and the limit's 13 yeah
(21:42):
they're not coming for us like relax everybody take your money and move on with
your life but they they get you on these emotional sales um now last one here
or maybe the last one we might remind me if i have others Some people do it
for the long-term care benefit.
That's a, that's a popular one. So yeah. Long-term care.
(22:07):
Uh, that's insurance brokers, you know, they're going to tell you,
you need long-term care.
You need to prepare for it. Um, we've noticed that most of our clients don't
really need long-term care policy or insurance or rider on their whole life
policy or rider on their term insurance policy.
You know why we're projecting them to spend more than that long-term care policy
(22:30):
would be in retirement. it.
And long-term care is not what long-term care used to be.
Long-term care policies weren't the worst thing, you know, 20 years ago when
they first got issued, but that was because the insurance company might be 30
or 40 years ago because they made some bad assumptions on that when they were first doing it.
They expected people to not live long and they expected people to drop these
(22:51):
policies, both of which were incorrect.
And now these policies, instead of paying long-term care for the entire life,
you'd probably get about $300,000 over three years.
Yeah. And a lot of these riders, you know, they put the, oh,
you have a $200,000 long-term care benefit.
Not to say that $200,000 isn't a lot of money, but if your wiggle room on you
(23:15):
being retired or not is not bigger than $200,000, we have a much larger issue here.
You are likely to run out of money.
We want a much larger buffer than that. I'm not a huge fan of leaving money
to kids. It's just a personal opinion.
We help people do whatever they want to do, but I don't personally think it's a great thing to do.
(23:36):
However, I tell people, look, there's no way. We have to project out market
returns, assumptions, all these things, and we have to prepare for the worst.
So we cannot sit here and just say, hey, you're going to spend a total of $1.7 million in retirement.
So you have 1.7, you know, that's not how it works.
We have to sit there and go, okay, you know, if things go really,
really well, you could end up giving your kids a lot more than expected.
(23:59):
If things go really poorly, they might only get a couple million,
but in all likelihood, they're going to inherit about the amount of money you
have when you retire in most instances.
Most people, you know, in some years the market goes down and they spend more than the earnings.
But over a long period of time, most people are typically, that amount isn't
(24:21):
keeping up with inflation.
So that's the only thing. But if I retire with four, typically there's going
to be four or five left in 30 or 40 years.
Again, that doesn't keep up with inflation. Four million on your retirement
date and four to five million on your death date are not the same thing.
However, it's still a couple million each to your kids. So I mean, Pretty good deal there.
(24:41):
But yeah, getting $200,000 out of a whole life policy to make sure,
oh, I've got long-term care if I need it for a little bit of time is just nonsense.
I mean, you're going to pay some of those policies. You might pay $200,000 in
commissions to the selling agent.
Yeah, again, it comes down to...
They're salesmen. They know how to make you think you need these things.
(25:04):
They know how to, you know, pull on your heartstrings, make you have guilt and doubt.
That's how they are so successful. And it's just we just want to make sure you're
getting the right information on it.
You don't really need a lot of these things that are sold to you as necessity. city. Yeah. No.
So I guess to wrap up the, the biggest myth here might be that you need whole
life insurance that you should buy whole life insurance.
(25:26):
Um, don't do it. Uh, we even saw, we were reading a, uh, it was an investment
news article you found about the top 40 myths and even, uh, referenced the white
coat investor that, you know, what does this doctor know?
He's like, well, apparently a whole lot more than the life insurance agents.
Yeah. It's, it comes down to information. What's available to you doing a little
research on your own, not taking what the insurance agent says as the whole
(25:50):
truth and kind of digging into it because they're not telling you everything you need to know.
Yeah. And I think the last one back to that tax issue is a lot of people say,
hey, once you max your 401ks and your Roth IRAs, this is the last tax deferred bucket you have.
That's not true. This is not some sort of tax miracle.
(26:10):
Don't fall for it. But in general, to wrap up on what our advice would be is,
hey, we don't say we like life insurance. We recommend life insurance.
We recommend life insurance for when you need it. It's vitally important that you have it.
However, just buy term insurance for the period that you need it because you
don't also need the same amount the whole time.
(26:32):
You know, when you're just buying a practice, you have a ton of debt,
you have kids, spouse might not be working.
OK, we get a lot of life insurance.
However, 10 years go by, you've managed to save a million dollars,
you've paid off your practice loan, you've paid off half the office building.
Now, all of a sudden, you might need half of that life insurance.
(26:52):
So as time goes on, you just scale down the life insurance until you don't need it.
But you buy a term, you buy it while you're young, you get it set up while it's
cheap, and that way you're good to go.
So buy a term and then save into retirement plans, max all that,
Matt, take the excess, put it in a brokerage account, get somebody to help you
that can make it really tax efficient because you really don't need a whole
(27:13):
life policy to make savings tax efficient.
It's actually very easy to do without any sort of fancy product.
Absolutely. Only thing I'll add in there is if you're working with someone,
just make sure they're investing in those low cost fund options because there
are even on the other end, you know, investing in other products and your brokerage
accounts, they can sell you some products that have high expense ratios and
(27:34):
high fees on that as well.
But just make sure you let them know you want the low expense options and that'll
be the best for you. Well, I would even say if they're not offering you the
low expense options or recommending to begin with, find a new one.
Again, that's unfortunate because they may not know.
So you just try and you may just need, you know, a consult with somebody else,
a third party to take a look at what you're investing in and see if there's
(27:56):
any ways to improve there.
Oh, perfect. Well, Ty, thanks for joining the show. We'll be back with you next
week. Thanks for having me.
Welcome back to another episode of Drilling It
Down this is your co-host Wes Lyon and
with me in chair number two today is tyler rott ty welcome to the show thanks
for having me always excited so this is going to be our first youtube podcast
that's exciting i mean we got this whole new setup so it's going to look real
(00:22):
nice if anyone has tips for lighting let us know oh you know we're We're on
a little bit of a makeshift studio,
but we've got some camera angles here and we're working on it.
Yeah, I think it's going to look great.
But no, well, today we're here to talk about top myths of permanent life insurance.
And today we're specifically going to talk about whole life.
We might do a whole nother episode on universal index life, or is it index universal life? Which one?
(00:50):
I mean, I think I've seen it both ways. They like to make it as confusing as
possible. Yeah, I find it hilarious.
Sometimes I'm on LinkedIn trying to find, you know, hey, need some talent,
try not to pay the recruiter.
And I found this one guy where I don't know, apparently he owns a company,
but all he does is go to all the life insurance salespeople and just comments
(01:11):
hilarious things underneath their whole life insurance sales.
So it's at least a good laugh.
And he's one of the only people I follow. So it gives me a good chuckle every time I pull it up.
But we gathered our top seven from him and a couple other sources we have here.
So, Tyler, what's your number one myth on permanent insurance?
I think the number one myth is that it's really a good investment. Yeah.
(01:36):
People think that it's the best way to prepare for retirement,
to grow their net worth, and really it isn't.
I think it's unfortunately due to the projections that are presented to them
and how it's sold to them.
Most of these doctors are getting their information from, unfortunately,
their friends. One of their friends turned out to be an insurance broker.
(01:57):
And so I think it's in the first day of training, they say, hey,
do you have any lawyer friends, doctor friends? you should reach out to them,
sell them some life insurance.
They need it. So they reach out to their doctor friends. They say,
look, whole life insurance is what you need.
Little do they tell you that you sign up for whole life insurance.
They get a nice fat commission check on it.
(02:18):
No, definitely. And you mentioned something in their projections.
Walk me through what you mean on the projections. And you have any examples you can share?
I mean, we've been seeing this lately, But I don't know for the viewers and
listeners out there, they quite understand what the word projection means,
(02:38):
because I don't think the insurance salespeople present it as a projection.
I think, I mean, from your experience, they present a projection or they present
here's what's going to happen. in.
They almost present it as a guarantee and they kind of gloss over the word projection.
And what I'm talking about here is, you know, they'll give you a pamphlet of
about 50 pages and a few of these pages are going to have tables of projected
(03:03):
premiums, insurance costs.
And I think the word they use is illustration.
We like the word projection because it makes a little bit more sense,
but I think they call it an illustration if you're ever looking at one of these.
That's exactly right. It does. I mean, it completely removes projection out
of that picture. It's saying, illustrate, this is what you're going to see.
It's definitely, they choose that language for a reason. But when it comes down
(03:26):
to it, these illustrations are projections.
And it's going to project, it's going to show you, you know,
what they want you to see, which is your premiums going in, the insurance costs
going down, and your cash value going up too.
Where it should be at the end of the term. The issue there is these growth rates
of the cash value, of the surrender value, of the death benefit are going up
(03:50):
at, most of the time, unreasonable amounts.
I saw a projection from one of my clients where they were getting it for 8%
return year over year, and that's after fees.
That's something you need to understand on this is all these illustrations,
the returns on this cash value is after fees.
So to get an 8% return after fees, you need above 10%, above 15%,
(04:15):
really, in some of these, you know, high fee products.
So it's just a lot of unreasonable returns.
I even saw one was 12% after fees. So yeah, that one we were looking at,
too, we couldn't back into the math on it.
Because, you know, the illustration was showing 6% annualized,
but we did the math and said, hey, if you just had zero fees and made 6%,
(04:36):
what would your money grow to?
And I mean, we just couldn't figure it out. But then I want to step further.
And this is very, very important to note for everyone, because the way a whole
life insurance policy works, it's based off some index.
And sometimes it can be the S&P 500, and it will have a cap on it.
Now, Now, they're guaranteeing a floor on the policy, right?
(05:00):
Now we say the policy is not going to go down. So putting a cap on the upside,
okay, I totally get that.
However, a lot of times they create indices.
So one of them we were looking at and it said, hey, you're going to get 6% annualized.
This is the actual performance of this index I'm recommending that you invest
in over the last 25 years.
(05:22):
And then we look and that index was created by somebody three years ago.
I mean, it's like, well, yeah, if we could go back in time and predict things
25 years ago, I would have told you to put all of your portfolio in Apple.
Yeah, Netflix, Google, Amazon.
I mean, and just would have made a killing. But, you know, you can't say,
hey, look, after the fact, if we would have done X, Y, and Z,
(05:45):
look how your policy would have performed.
You know, in our world, they make us do something, not really the consulting
world, but in the investment world,
they make you do something that is, you know, past performance is not guaranteed
or is it indicative of future results to just basically tell you that, hey,
this did this in the past.
(06:06):
It has zero bearing on what this will do in the future.
But they get a lot of people on these projections or illustrations.
And then, Tyler, have you seen, if you dig in the back, I think they're required
to show you the illustration with the minimum guaranteed value.
Yeah, and those come to around 1% to 2% when you back into the numbers there.
(06:27):
And that's not the one that they harp on when they're selling you the product.
They're saying, hey, you're going to get 8% return on your investment if you do this.
Guarantee is only about 1%. No, so we haven't seen any of them perform.
I mean, we've had people come in here that they put 1.4 million into them and
(06:48):
they're only worth 1.2 million.
And then to make it worse, they owe taxes on the money. So that might get into
our next myth that these are a tax shelter.
So Ty, what are they typically selling when they sell these things for tax-wise, is it?
So they say that you put in your money, you can get it out tax-free.
(07:10):
Little do they tell you that you're taking a loan against the policy.
So that loan incurs interest, additional fees on the policy,
reducing your dividends.
Also, they don't tell you that should the policy not perform,
should the policy terminate, all those loans that are tax-free before are fully
(07:30):
taxable at ordinary income.
At ordinary income rates. Exactly. So you're paying 40% state,
federal, even higher depending upon where you live, what your income is.
And for the listeners out there, I think the comparison they're always making
is this is tax-free. And if you get into a brokerage account, it's not.
However, most of our clients in retirement pay long-term capital gains at 15%
(07:53):
to 20%. So you're potentially doubling the tax rate on the policy. Yeah.
And that's capital gains as well. You also have basis in your investments too.
So, you know, you're not paying full tax on your sale. Now, you do get basis in the policies.
However, I think what people don't realize is what's different.
If you put the money into the S&P 500, you put a million dollars in over 20
(08:16):
years, your basis is a million dollars, right? Pretty plain and simple.
Where people get tripped up is you put a million dollars into a whole life policy.
Well, they take all their fees out, all the cost of insurance, all of that comes out.
Before they calculate your basis.
So you put a million in, you might only have a tax basis of 600,000.
So that's how you lose money and still pay tax.
(08:38):
Yeah. And that's even if your cash value is where it should be.
Let's say, you know, you put in a million, your basis is about 900,000.
Oh, little do you know, your cash value is about 950,000. You still end up paying
tax on that difference there.
We were talking about this in the monthly Drilling It Down too is,
you know, okay, what's the likelihood?
(09:00):
They're showing you all these things, but what's the likelihood that my policy doesn't perform?
Pretty darn likely. In 1979, the government set out to do a study on how bad
these policies were or good.
And they found out that most policies only returned one to 2% annualized,
and they're charging more than that on fees.
(09:20):
I mean, it's a high likelihood you're going to end up getting smoked on one of these policies.
And I think part of that comes down to who, you know, insurance companies aren't
any better investors than, you know, low-cost indexes, low-cost mutual funds.
In fact, they're worse investors, really.
So you're paying these premiums, you're paying these fees for a product that
(09:41):
really isn't going to return you what you could do on your own with,
you know, a Vanguard low-cost full market ETF or mutual fund.
Now, that kind of brings me, and I'm going out of order here,
but it kind of brings me But, you know, in a whole life policy,
Tyler, if I recall correctly, but this gets a guaranteed amount to your kids.
(10:02):
A guaranteed amount, yes, in the form of a death benefit and cash value. Do you get both?
Oh, no. There are going to be some upset life insurance agents when they hear this.
No, I don't think most people know that. We tell this to everybody that has
one, and for those of you out there who don't feel bad, almost every doctor
(10:23):
gets swindled on one of these in their lifetime.
So they usually come in as part of our tax and business planning program,
and we have to go through it and tell them.
And it's always, we go through these things, and I think most people don't quite
grasp. It's kind of like us trying to learn how to do a root canal.
Don't know what you're talking about. Great, but I don't have the baseline. line.
(10:45):
And I think a lot of people don't quite understand how impactful the fees can
be, the cost of insurance, all this stuff we're talking about.
But the second we tell them, by the way, do you know your kids are only going
to get the death benefit and not the death benefit and the cash value?
And that seems to throw everyone for a curveball. If you have a half million
dollar cash value and a million dollar death benefit and you pass away,
(11:06):
your kids get $1 million, not $1.5 million.
So you don't receive both of them. The other thing is.
You know, you put a million dollars into this thing and they perform according
to the government study, which we don't have any more recent studies because
there's no uniform requirements to report this performance, which is just insane.
(11:28):
But the insurance money or insurance companies spend a lot of money lobbying.
So we don't have anything. I will tell you from our experience of seeing probably
five of these a month on average, those numbers from 1979 still hold true.
They're about one to two percent performance wise on average.
Now, the insurance companies will calculate performance however they like.
(11:50):
I like to just look at, hey, they're selling it as an investment.
They're not selling it as life insurance.
So how much money do you put in? How much can you get out? That's very simple math.
The study we actually referenced, though, that went a little bit further and
said, what would the cost of insurance be in term?
So let's take out the cost of insurance, and they still only get 1% to 2% on
(12:10):
that. But okay, you've got this guaranteed amount.
But if you just invested it and you made 6% over the long run instead of 2%,
or let's say 7%, because I think the rule of 10, your money doubles every 7% doubles every 10 years.
So at 2%, your money is going to double, I don't know, once in 40 years.
(12:32):
And at 7%, it's going to double every 10 years.
Your kids are going to have a whole lot more money, although not guaranteed.
They're going to have a whole lot more money if you just don't get in bed with an insurance company.
Yeah. Or if you are in bed, you get term insurance investment count on the side.
Term insurance, we've mentioned it, is the best cost benefit for the amount
(12:55):
of insurance you receive for the premium cost there.
There is fees associated with investing, your expense ratios and all that,
but they are much, much lower than the insurance costs and the other fees associated
with permanent life insurance.
Oh, absolutely. So most people, that kind of brings up a good point before we get to the next myth.
What is whole life insurance, Tyler? If you could describe it in very simple
(13:19):
terms to somebody of, hey, what are you actually getting when you purchase this?
So simply, simply think of a box.
You got a cardboard box here that you're going to mail a package to somebody
and you're going to fill it in with a few things that you want to ship to somebody.
So first part of this whole life policy is the insurance.
What that insurance is, is a term policy. So you take your term policy, you put that in the box.
(13:43):
Next thing is we got this cash value. So how are we going to build up our cash value?
We have an investment account. So we have our cash value. We have our investment
account. We have our term insurance in our box.
But if you shake that box around, those things move. So we can't ship it to our friends.
Otherwise, it's going to get damaged. So what we got to do, we got to put all
those little packing peanuts, those plastic airbags.
(14:04):
You know what those plastic airbags and packing peanuts are, Wes?
What? Those are fees. Fees. You shove enough fees in there, that investment
product and that investment account, that term policy don't move around.
And that's again, where all that return goes, all those fees take all that investment return away.
Yeah. I'd almost equate it to, let's say you've got like a box big enough to
(14:26):
put a mattress in it and there's just two shoe boxes in the box and then the peanuts are the fees.
So we have to load the whole thing up to not damage the rest and not have everyone
to figure out that actually inside this box are separate components.
But no, that one right there, I always tell people, it's just all those fees.
(14:46):
It's going to get you. And the reason this gets sold, as you had mentioned before,
is a lot of the times the sales charge on the front end can be 40 to 100% of the first year premium.
So they'll convince you to start this thing with $100,000.
And they'll forget to mention to you that they're putting $50,000 in their own
pocket for you buying this policy.
(15:06):
There's a huge financial incentive for insurance agents to sell you whole life,
permanent life insurance over term. Term, you're not going to make as much.
Yeah. So another favorite one of mine, and sometimes I overlook this because
we work in this world, so we know not to do it.
(15:27):
But some people do get called up. They see things on social media and infinite
banking or rich people do this. So you should do it, too.
I mean, Tyler, is that just a scam? No, I mean, it's not. It's it's true.
The ultra wealthy do take advantage of some of these strategies.
(15:49):
But the reason they do it is they've taken advantage of all the other tax advantage
strategies before this.
They have so much money. They don't know what to do with it.
Now, I'm going to get an argument here with you.
I think that's incorrect. Okay. I think they do it because they've also been
swindled. Probably. Probably.
There's better ways to pass money. Because I know in my first role,
(16:15):
we were working with some pretty ultra high net worth people.
Back when I wasn't solely dentistry. To try to protect, I won't say anything
to give away, but one was like an American dynasty family that we had.
I mean, when this man rolled to the door, his security rolled to the door.
His kids and grandkids would call me, but the man himself, absolutely not.
(16:38):
He rolled right into the managing partner's office, didn't say hi to the front
desk, security out the wazoo coming up.
And I can guarantee you that man had zero whole life insurance policies.
We helped him solve his estate tax issue, and you really didn't need to get
one. We had another one, a famous musician, but not pop music,
(16:58):
more of like classical stuff.
And, you know, I don't think that that pays that well. So I think she'd inherited the money.
However, again, zero, zero whole life insurance on this.
So I haven't run into it with anybody ultra wealthy. I can name a few people
(17:19):
off the top of my head that have gotten swindled into this that I think are
in the 60 to 80 million dollar range.
And when they told me about it immediately, each time my first gut instinct
went, there's an easier vehicle or a cheaper way you could have done this.
You know, you can't save them all. So I tend to think that that's a little bit
(17:41):
of a scam. I will admit that some wealthy people do it. I've met them.
However, most of your ultra wealthy people aren't doing it. I'd even take that
a step further. I had this question the other day.
Somebody called me. It wasn't to do with life insurance. I think it was to do
with running a commercial real estate conglomerate. And he asked,
well, of the top doctors that you have or that you've seen that have really
(18:04):
made it financially, what have they done?
And I said, well, top of my head, I can name five or 10 and they've all done the same thing.
Low cost investments and they just saved a lot and they've used the time value
of money to their advantage.
There's no, I don't think there's some secret out there for how people get wealthy.
They just save more than they spend.
(18:26):
Get it auto drafted in. Dollar cost average, no better way to do it, really.
You spend, any excess goes into savings, and you just don't even think about
it. It's the best way to grow your net worth.
Well, another myth I have here is it allows you to spend down other assets because
you know your kids will get this.
(18:47):
Is that true? I mean, not really. Again, you're paying these premiums every month.
That's bringing down your monthly cash flow. You're spending down your other assets.
It's not the best thing. Again, they're only going to receive the death benefit.
It's just a lot of these...
(19:08):
Promises are really oversold. If you need money in retirement,
do you look for an annuity instead as a way to guarantee funds for you?
It's not the best way. And if you're really looking to pass money down to your
kids, there are better ways and other ways to pass them down tax-free.
I mean, you could always just make a gift of the premium each year instead of
(19:33):
the premium, though, and get it in a brokerage account in their name and let it grow.
Absolutely. There's lots of ways to do this that don't involve whole life insurance.
Back in the day, this is my rule. I don't know if you've ever heard the story
of why I have this rule, but I will not talk to your financial advisor.
I will talk to your CPA if we're working together. I will not talk to your financial advisor.
(19:55):
Made this mistake. This guy had shown one of these illustrations,
and my client thought she was
set to retire, had put like $115,000 into a whole life insurance policy.
And he had some illustration where this $115,000 turned into $10,000 a month, which was absurd.
So he wanted to have a call with me. And the first thing out of his mouth,
(20:15):
and this client thought she was going to retire, and she wasn't.
And we had to go in there and redo everything, and she had to work for another four or five years.
I mean, it was ugly. Fortunately, we were able to fix it, and she got out on
time. But she wasn't even close to retirement when she came to see us.
I mean, I think she had a net worth of like $700,000. dollars
like it didn't take a genius to figure out this wasn't going to work
(20:36):
but first thing he says was well have you even thought about
her legacy planning goals i sat there i started
yelling at them i'm like who cares about legacy planning she doesn't have enough
money for herself i don't care about her kids yeah like if we can solve enough
money for herself we'll care about her kids secondary and it's just a sales
tactic that they use to sell this nonsense and that they they sell
(21:00):
a lot of this for estate planning purposes and reducing taxes after death.
You know, majority of our clients don't have that issue where they won't pay
estate taxes, um, cause their estates not large enough.
You know, some may have estates that, you know, we need to do some planning
on to reduce the estate taxes and a stack burden, uh, tax burden there,
(21:20):
but we're not going to use whole life to do it.
No, that one's a, everyone always freaks out over the estate tax,
but I can tell you from like a family standpoint,
I remember everyone in my family we call me freaking out my grandmother
passes away oh what have we done they're gonna look at
us and what about these gifts she's given us we don't
know if she reported them and i said that i'm like she's only
got three million dollars and the limit's 13 yeah
(21:42):
they're not coming for us like relax everybody take your money and move on with
your life but they they get you on these emotional sales um now last one here
or maybe the last one we might remind me if i have others Some people do it
for the long-term care benefit.
That's a, that's a popular one. So yeah. Long-term care.
(22:07):
Uh, that's insurance brokers, you know, they're going to tell you,
you need long-term care.
You need to prepare for it. Um, we've noticed that most of our clients don't
really need long-term care policy or insurance or rider on their whole life
policy or rider on their term insurance policy.
You know why we're projecting them to spend more than that long-term care policy
(22:30):
would be in retirement. it.
And long-term care is not what long-term care used to be.
Long-term care policies weren't the worst thing, you know, 20 years ago when
they first got issued, but that was because the insurance company might be 30
or 40 years ago because they made some bad assumptions on that when they were first doing it.
They expected people to not live long and they expected people to drop these
(22:51):
policies, both of which were incorrect.
And now these policies, instead of paying long-term care for the entire life,
you'd probably get about $300,000 over three years.
Yeah. And a lot of these riders, you know, they put the, oh,
you have a $200,000 long-term care benefit.
Not to say that $200,000 isn't a lot of money, but if your wiggle room on you
(23:15):
being retired or not is not bigger than $200,000, we have a much larger issue here.
You are likely to run out of money.
We want a much larger buffer than that. I'm not a huge fan of leaving money
to kids. It's just a personal opinion.
We help people do whatever they want to do, but I don't personally think it's a great thing to do.
(23:36):
However, I tell people, look, there's no way. We have to project out market
returns, assumptions, all these things, and we have to prepare for the worst.
So we cannot sit here and just say, hey, you're going to spend a total of $1.7 million in retirement.
So you have 1.7, you know, that's not how it works.
We have to sit there and go, okay, you know, if things go really,
really well, you could end up giving your kids a lot more than expected.
(23:59):
If things go really poorly, they might only get a couple million,
but in all likelihood, they're going to inherit about the amount of money you
have when you retire in most instances.
Most people, you know, in some years the market goes down and they spend more than the earnings.
But over a long period of time, most people are typically, that amount isn't
(24:21):
keeping up with inflation.
So that's the only thing. But if I retire with four, typically there's going
to be four or five left in 30 or 40 years.
Again, that doesn't keep up with inflation. Four million on your retirement
date and four to five million on your death date are not the same thing.
However, it's still a couple million each to your kids. So I mean, Pretty good deal there.
(24:41):
But yeah, getting $200,000 out of a whole life policy to make sure,
oh, I've got long-term care if I need it for a little bit of time is just nonsense.
I mean, you're going to pay some of those policies. You might pay $200,000 in
commissions to the selling agent.
Yeah, again, it comes down to...
They're salesmen. They know how to make you think you need these things.
(25:04):
They know how to, you know, pull on your heartstrings, make you have guilt and doubt.
That's how they are so successful. And it's just we just want to make sure you're
getting the right information on it.
You don't really need a lot of these things that are sold to you as necessity. city. Yeah. No.
So I guess to wrap up the, the biggest myth here might be that you need whole
life insurance that you should buy whole life insurance.
(25:26):
Um, don't do it. Uh, we even saw, we were reading a, uh, it was an investment
news article you found about the top 40 myths and even, uh, referenced the white
coat investor that, you know, what does this doctor know?
He's like, well, apparently a whole lot more than the life insurance agents.
Yeah. It's, it comes down to information. What's available to you doing a little
research on your own, not taking what the insurance agent says as the whole
(25:50):
truth and kind of digging into it because they're not telling you everything you need to know.
Yeah. And I think the last one back to that tax issue is a lot of people say,
hey, once you max your 401ks and your Roth IRAs, this is the last tax deferred bucket you have.
That's not true. This is not some sort of tax miracle.
(26:10):
Don't fall for it. But in general, to wrap up on what our advice would be is,
hey, we don't say we like life insurance. We recommend life insurance.
We recommend life insurance for when you need it. It's vitally important that you have it.
However, just buy term insurance for the period that you need it because you
don't also need the same amount the whole time.
(26:32):
You know, when you're just buying a practice, you have a ton of debt,
you have kids, spouse might not be working.
OK, we get a lot of life insurance.
However, 10 years go by, you've managed to save a million dollars,
you've paid off your practice loan, you've paid off half the office building.
Now, all of a sudden, you might need half of that life insurance.
(26:52):
So as time goes on, you just scale down the life insurance until you don't need it.
But you buy a term, you buy it while you're young, you get it set up while it's
cheap, and that way you're good to go.
So buy a term and then save into retirement plans, max all that,
Matt, take the excess, put it in a brokerage account, get somebody to help you
that can make it really tax efficient because you really don't need a whole
(27:13):
life policy to make savings tax efficient.
It's actually very easy to do without any sort of fancy product.
Absolutely. Only thing I'll add in there is if you're working with someone,
just make sure they're investing in those low cost fund options because there
are even on the other end, you know, investing in other products and your brokerage
accounts, they can sell you some products that have high expense ratios and
(27:34):
high fees on that as well.
But just make sure you let them know you want the low expense options and that'll
be the best for you. Well, I would even say if they're not offering you the
low expense options or recommending to begin with, find a new one.
Again, that's unfortunate because they may not know.
So you just try and you may just need, you know, a consult with somebody else,
a third party to take a look at what you're investing in and see if there's
(27:56):
any ways to improve there.
Oh, perfect. Well, Ty, thanks for joining the show. We'll be back with you next
week. Thanks for having me.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.