The White Coat Investor and Whole Life Insurance

The White Coat Investor (WCI) is a financial blog written by an emergency room doctor out of Utah. Having enjoyed, and even been entertained with the thoughts, ideas and opinions this blogger has conveyed over the years, it’s with some diffidence that I address the anti-Whole Life insurance bias which runs so prevalently in this blog. In fact, it is only because of the incredible bias against Whole Life insurance, which could precariously endanger the public financially, that I step forward to hopefully dispel the misnomer and outright falsehoods that this blog perpetrates, not only against whole insurance products but against Whole Life insurance agents as well. The half-truths, misconceptions, and inflammatory conclusions about Whole Life insurance that the WCI has disseminated as fact(s), must be addressed to protect the public who could be injured or crippled financially by supposing such rhetoric to be accurate or reliable.

The latest bee in the WCI’s bonnet about Whole Life insurance seems to be, when an agent, out of ethical and legal obligation, reveals to a prospect or client the fact that cash value in a life insurance policy is not reported as an asset on the Free Application for Federal Student Aid (FAFSA). This is such a petty complaint, it’s surprising the WCI risks his reputation disputing such a fact when he labels this full disclosure as;

  • “merely misleading…for the typical reader of this blog, it doesn’t matter.”[i]

Obviously, the question arises, “How can fulfilling an ethical and legal obligation be ‘merely misleading’?” Perhaps the WCI also believes informing his patients concerning the side-effects of the medications and procedures he prescribes is “merely misleading” as well? After all, the side-effects don’t matter to most of his patients! That would be bad medicine as well as poor reasoning. It’s not good for patients to not be fully informed, period. And full disclosure has to take place before full consent can be given. Just as full disclosure protects a patient’s rights in health care, full disclosure also protects a client’s rights in the life insurance arena. Without full disclosure how can anybody choose what is best? Be realistic, Mr. WCI, and stop disclosing how ill-informed you are by beating this dead horse.

The next latest objection the WCI has about Whole Life insurance is when an agent informs a prospect or client that “Term Life Expires Without Paying Anything.”[ii] Spinning is something bloggers, lawyers and the media are good at, but spin doesn’t change the facts. Here is what is required of an agent to tell prospects and clients concerning Term life insurance coverage.

  • 99% or more of all Term life insurance policies never pay a death benefit.
Wealth Summit 2018

That is a far cry from the spin that the WCI reports agents are telling Whole Life insurance prospects. Words mean something and the words the WCI uses here sound scary and foreboding. Yet, wouldn’t you want to know the fact that 99% or more of all Term life insurance policies never pay a death benefit before you purchased a Term policy? Here are a few reasons why this wording matters.

  1. Term life insurance coverage is the most expensive insurance to maintain and sustain over your entire life time.
  2. As the cost of the Term insurance coverage rises, the premiums become prohibitively higher than people can afford to comfortably pay.
  3. Many of these Term policies are converted to Whole Life insurance coverage before the premiums get too expensive for the policy owners, while others Term policies are simply allowed to lapse.
  4. The Term policies that do lapse never develop any cash value and so the owners of these policies never receive a death benefit payout. The only thing they have received from owning a Term life insurance policy is the guarantee that if they had died while the policy was still in force, a death benefit would have been paid to their beneficiaries.

These facts are not gimmicks used to scare people into purchasing permanent life insurance coverage, as the WCI implies. They are, however, important facts that must be understood if a prospect or client wants to avoid the possibility of paying for premiums over a course of 10-30 years only to face the future lapse of their policy due to unaffordable increasing premiums. This again is part of full disclosure, and the snarky comment of the WCI, “I’m always surprised to see people fall for this line, but they do,”[iii] is completely incongruous with someone who holds themselves up as someone honestly educating the public about life insurance.

  • “Stick to your last shoemaker,” especially when insurance medical malpractice cases prove that “28% of intensive care unit diagnosis were in error, proven on autopsy”[iv] and failure to diagnose heart disease leading to the death of the patient occurred 70% of the time in ED, according to the American College of Cardiology.

This is not to imply that the WCI is misdiagnosing or killing his patients in his ED, but rather these facts provide a stark contrast to what the WCI expectations are concerning life insurance agents compared to the proven results that occur in the ED of our nation’s hospitals. Obviously, the WCI simply can’t fathom how such misleading information could financially cripple or injure a prospective or current life insurance client, or I am sure he wouldn’t write such nonsense. The obvious fact remains, nobody wants to reach age 65, 70 or 80 and not have life insurance coverage, unless they don’t really care about anybody but themselves. Yet, this misnomer and half-truth is commonly propagated by those who don’t realize that the cost of Whole Life insurance can disappear for the average person, ages 21-65, within 8-12 years when the policy is engineered for high cash value and minimal death benefit. Ironically, engineering a policy like this will provide a much higher death benefit and cash values when you do reach the point in your life that you no longer want to pay premiums. Term coverage will always have a premium to pay for the rest of your life and that premium will get prohibitively larger the longer you live.

As far as “return of premium Term coverage,” why waste your money giving the insurance company a “free loan” and not allowing you access to any of it? Money paid for most recap Term policies can be used for better purposes, although on occasion they may make sense for short time periods (5 or less years, typically.)

The WCI continues to bluster about Whole Life insurance arguing that it isn’t safe.[v] The problem with his reasoning here is that he is using abductive reasoning which is very common in the blogosphere, the jury room and in the media. The only problem is, it isn’t valid, and at best, can be called a guess or loose opinion. Life insurance, however, is based on actuarial science. Actuarial science is a science based on deduction, (i.e., the science of large numbers, aka, the gold standard.) To imply that cancelling a policy makes you lose money is like saying a doctor is at fault for you not properly taking the medicine prescribed as directed. That isn’t a doctor’s error, that’s a compliance issue. As long as full disclosure is provided prior to the contract being issued and accepted by the owner, the safety of a Whole Life insurance contract relies not on the insurance company but the owner of the policy. The insurance company contractually guarantees the safety of your premium dollars, but the owner has to keep their end of the contract and pay the premiums or they let the insurance company off the hook. That is a better guarantee than the WCI can provide his patients as their doctor, so what’s his beef?

Of course, you will lose money if you don’t pay the premiums before the cash values offset the cost basis of a policy in a Whole Life contract, that’s a given! Interestingly enough, using the WCI’s own reasoning regarding why you shouldn’t expect a payout on Term insurance unless you die first can be used here to debunk his idea that Whole Life insurance isn’t “safe”.

  • If you don’t keep your part of the contract (i.e., die, in order to get a payout under a Term policy contract, or continue to pay premiums to make sure you attain the guarantee of having more cash value than your cost basis in a Whole Life contract) that’s your bad not the life insurance company’s.

But the WCI doesn’t stop his untenable conclusions with safety issue. He goes on to attack the liquidity of Whole Life cash values and deludes his readers into thinking that savings accounts and mutual funds provide a greater liquidity than the cash value in Whole Life insurance. His exact words are:

  • “I guess it’s more liquid than owning a website or a rental property, but it pales in comparison to the liquidity available in a savings account, or a mutual fund that can be liquidated any day the market is open.”[vi]

Where does one start to refute this oblivious inaccuracy? A small observation, focusing on savings and mutual funds, produces an erroneous inductive conclusion:

  1. Yes, savings are very liquid but when you access them you also lose the growth. Not good!
  2. Mutual Funds, too, are liquid, but again you lose the growth as soon as you liquidate them. Again, not good!
  3. In contrast, cash values in Whole Life insurance are a reflection of the premiums you have paid to purchase paid-up insurance. This paid-up insurance can be surrendered and liquidated or it can be leveraged and you can use the insurance company’s money while your premium dollars used to purchase paid-up insurance continue to compound in the policy. Good!
  4.  This unique component of Whole Life insurance can be the most profound living benefit that a Whole Life policy provides the owner while they are living. It is very similar to owning equity in real estate and taking out a line of credit against that equity. You continue to benefit from the real estate gains (or, with real estate, suffer the losses) while you get to use the cash value for another capital asset purchase or investment. With the Whole Life insurance policy, when you take a policy loan, by leveraging your paid-up insurance, you continue to experience the guaranteed compounding growth as well as any dividend payments the company provides while you get to use the insurance company’s money to invest, purchase assets or recoup interest that you typically would pay to others for using their money. Very good!

Warren Buffet’s father told him at the age of 7, that the best way to create wealth is to leverage another person’s money. Jeff Bezos, is on record stating that “Profit margins are not what Amazon is about. Profit margins pay taxes before they can be spent while free cash flow can be used over and over again without incurring additional taxation.”[vii]

The liquidity that can be experienced with high cash value Whole Life insurance, is a huge improvement over liquidating mutual funds or savings accounts where you would actually be forced to lose the compounding annual growth rate (CAGR). Not so, in a cash value policy loan against a Whole Life insurance policy because there is no penalty or fee associated with the loan and there is no loss of the CAGR. Very, good!

Obviously, the insurance company isn’t going to loan you money without charging you an interest rate, but make sure you never borrow against your Whole Life insurance policy unless you know for sure that you can earn a higher rate of return on the capital you borrow than what the insurance company is charging you in interest. This will ensure that you will increase your wealth just like Warren Buffet’s father told him by leveraging another person’s money, namely the insurance company’s money.

Furthermore, if you really want to get involved and keep more of what you make, then take Jeff Bezos free and honest advice and learn to practice the free cash flow method of money management that he has perfected. You can take advantage of the Whole Life insurance policy loan provision, interest only for life guaranteed, and create some serious wealth that far surpasses the CAGR of the policy or even the average returns of the market.

Moving on, taxes are greatly misunderstood by much of the American public, especially when it comes to IRAs 401(k)s 403(b)s etc. And the WCI falls right into the trap the IRS set for the American public when he states, regarding Whole Life insurance, “There are no up-front deductions like a 401k.”[viii]

  • Fact: There are no up-front deductions for any 401k, IRA, 403b, 529 contribution! There are only tax deferrals.

You can defer taxes when you contribute to these plans but you cannot deduct those taxes. And that brings up a very interesting fact. Would you rather pay your taxes today, or pay them with inflation reduced dollars later? Play around with an inflation calculator for a short period of time and you’ll discover that $20 purchased a substantial amount of value, compared to today, 50 plus year ago. Today, that $20 bill comparatively, will only purchase around $2.50 of value. That means that the dollars you are going to pay in taxes on deferred earnings can create a higher value loss to you later merely due to inflation. And don’t be gullible and fall for the IRS trap that says “You will be in a lower tax bracket when you retire.” That simply doesn’t happen as often as people like to think, unless you decide to live at a much lower standard of living once you retire.

Of course, with the liquidity of cash values as mentioned above, the rest of what the WCI says about other investments is fairly sound advice. And it applies to Whole Life insurance policy owners as well as traditional investors. Namely, taking the capital you have access to, by leveraging your policy, and investing it so you can take advantage of the capital gains write-offs, the depreciation that you can claim on real estate, the loss that you can claim on bad investments, etc. Just because you own a Whole Life policy doesn’t mean you shouldn’t take advantage of all the other tax advantages and earning opportunities that are available. But by using the insurance company’s money to make these comparable investments you will also be able to enjoy the CAGR that the policy experiences while you attain the benefits of all the amenities that the WCI mentions concerning taxes, investing, etc. The bottom line here is to “think both”, not either/or. Thinking both is always worthwhile.

Owning Whole Life insurance isn’t a stand-alone investment. In fact, it can’t even be classified as an investment because an investment carries with it the risk of losing 100% of your invested capital. Whole Life Insurance, as we have already discussed, has a guaranteed contract protecting you from any loss. But Whole Life insurance provides so much more than a death benefit and a safety net for your premium dollars. Those features are merely what the consumers demanded of the life insurance companies back in the day when the only product available was renewable Term insurance coverage. Consumers demanded that they wanted to have equity in their life insurance, like they did in their mortgage and other asset purchases. Today, Whole Life insurance and particularly, Participating Whole Life insurance, is the only insurance product that allows policy owners to develop equity in the product they pay premiums on. All other life insurance products, developed by the insurance companies were designed to reduce the insurance companies’ risks, whereas with Whole Life and Participating Whole Life the insurance company assumes the entire risk, except the payment of premium and any interest on outstanding policy loans. Here are a few other benefits for the owner of Participating Whole Life insurance:

  1. Tax preferred growth. Money that is paid into Participating Whole Life insurance is money that the IRS considers, “First In, First Out” (FIFO).
    1. This means that you can withdraw all the premiums you paid in without paying any taxes.
    2. After you have withdrawn all your premiums from the policy, using loans against your policy will prevent you from ever having to pay taxes on the growth the policy experienced.
    3. Allowing dividends to offset the interest on policy loans can reduce or eliminate you having to pay the interest cost on those policy loans out of pocket.
  2. The interest you do pay when you borrow against your Whole Life insurance policy can become a real honest 1040 tax deduction, not merely a tax deferral. This occurs when you have used the funds borrowed for an investment or for business purposes. This feature alone makes Whole Life insurance the “sweetheart of the internal revenue code” for those who understand the value of what the 1040 deduction for investment and business loans can produce over a lifetime of investing and/or business. This is why nearly 1/3 of all high cash value policies are sold to corporations. And maybe, this is why an emergency doctor like the WCI doesn’t really grasp or appreciate the value this tax deduction can provide. As a mere employee, he may not have a business risk or investment interest risk he needs to offset.
  3. The “interest only for life” feature of a policy loan is what makes the free cash flow model of money management, which Jeff Bezos speaks of in his 2004 shareholders notes, possible for all of us. None of us are exactly like Jeff Bezos, the richest man in the world, but we can all learn from his money management skills. Using capital over and over again and only having to pay simple interest on it once a year, allows the average American to super leverage money and in doing so permits a person to keep more of what they make.

Robert Shiller, Noble Laureate and Economic Professor at Yale, has reported that:

“Americans save 40 years of their life and earn a zero percent rate of return.”

John Bogle, is on the record for saying that:

A 2% fee will allow the money manager to keep 80% of your profits.”

Warren Buffet willing has shared his two rules of generational wealth. Those two rules are:

“1. Never lose money. And 2. Never forget rule number 1.”

Yet, according to Forbes, Times Magazine, the Tax Foundation and others, Americans are losing between 37.8% to 50.1% of each dollar they earn to:

  1. Taxes
    1. Federal
    2. State
    3. Local
    4. Sales
  2. Debt
    1. Personal debt has grown 15% since 2003
    2. 9% of the average income is spent on interest (2015)

Whole Life insurance can become a buffer against taxes and debt, not only for the next generation but for policy owners themselves if they will but just realize and utilize the potentials and benefits that the ownership of Whole Life insurance provides them.

The WCI makes himself look foolish when he mocks the fact that “Whole Life insurance has historically taken average to better than average care of premiums paid.” He further exposes his ignorance concerning Whole Life insurance when he states there is a, “requirement to pay interest in order to use my own money, or a requirement to answer pesky questions about my health, or a requirement to submit body fluids to a medical exam, or a requirement to pay a commission to an insurance agent and avoid risky activities.”

First of all, nobody wants to be exposed to the risks of someone in the life insurance pool by allowing them to be admitted into the insurance pool with health risk without charging them for that added risk. That would cost the rest of the insurance pool big time, and it is exactly why The Affordable Health Care Act has produced such sky-high health insurance premiums. Plain and simple, socialism doesn’t work. A prescreening medical exam is part of all insurance contracts, as it should be, even for the Term insurance coverage the WCI recommends. So, how hypocritical is that? What exactly is the risk the WCI is suggesting this free exam might pose? As a doctor, he should know better!

Secondly, his comment, “requirement to pay interest in order to use my own money” exposes such an unawareness about what happens when a Whole Life insurance loan is taken, that it is comical. As mentioned earlier, a life insurance company NEVER loans a Whole Life insurance policy owner their own money, they only loan the insurance company’s money to policy owners. This is a brilliant fact about Whole Life insurance loans. It provides the average American the opportunity to leverage another person’s money! The very thing Warren Buffet was told to do at age 7 by his father.

Thirdly, the “pesky questions about one’s health” is almost funny, if it wasn’t so serious. As a retired doctor myself, I am shocked at how many times those “pesky questions” have alerted or saved a person’s life by alerting a client of a misdiagnosis or over medicated condition. Nobody in the health care arena should ever be concerned about another health care provider or screener asking further details about someone’s health or wellbeing. We are talking about saving lives here, not some silly process that agents dance through to make themselves look good. Besides, as a life insurance agent those “pesky questions” which some doctor didn’t think important enough to ask but we did, have saved lives. So, Mr. WCI, what is so bad with a free health and family history screening when applying for life insurance? Clinically speaking, absolutely nothing!

Fourthly, risky behavior and activities place you in a higher risk category, exactly like drivers under the age of 25 are in a higher risk class than older drivers. Again, the best science, the science of large numbers, are at work here dictating what needs to be done to make the purchase of Whole Life insurance risk free as possible so the insurance company can provide those guarantees. The rest is up to you, adhering to the Terms of the contract.

Finally, and this one is the icing on the cake, commissions! A policy owner never pays a commission to an insurance agent when purchasing a Whole Life insurance policy. NEVER! Only fee-for-service financial advisors and planners are allowed to make money directly off a sale or any service leading to a sale of Whole Life insurance. In fact, it is illegal even for a life insurance agent to “negotiate” a lower cost on an insurance product by reducing or returning any part of a commission earned to a client.

When an agent earns a commission, they earn it directly from the insurance company which is investing the policy owner’s premium dollars. The cost of paying an agent’s commission is part of the cost of doing business for the insurance company. This is a far cry from the misinformed opinions of most bloggers and the media portrayal of the life insurance agent greedily sticking the client with a high commission. Unlike real estate commissions, and for that matter, a doctor’s fee for service under third party reimbursement, a life insurance agent has no control over what he/she is paid. They can’t negotiate a lower price and they can’t legally share what they are paid with a client as a way of lowering the price of the policy for a client. Doing so is called rebating and can mean jail time as well as a stiff fine.

Commissions earned by an agent are also based on the retention of their clients, a nice way to reimburse them for their quality of service they provide to their policy owners, and on how suitable they are at educating the public for their need of life insurance coverage and the continuance of that life insurance.

America once understood the value of this awesome service provided by licensed and appointed agents. Many homes have been paid off due to Whole Life insurance loans or payouts. Colleges, non-profit organizations, banks and corporations have funded endowment plans, offset their costs or research and production, while millions of Americans have used their Whole Life cash values in order to access capital when capital was limited, dried-up or disappeared such as in the depression or recessions of the market.

As a doctor myself, I find it so petty for the WCI to take offense at the statements that he should “stick to medicine,” or that “he is a young doctor that thinks he knows everything.” The fact is, the WCI is a very bright and gifted writer, and intelligent enough to get through medical school, residency and get hired by a hospital. For him to repeat such slurs against his character or intelligence only gives credence to the ones making such slanderous accusations. Personally, I have no knowledge concerning the WCI and his medical competency levels, but his blog is well written and, for the most part, beneficial to the public in my opinion. But this I do know, the WCI’s knowledge about Whole Life insurance is severely lacking and that is unacceptable.

Anyone who holds themselves up as a teacher or educator, needs to be both knowledgeable and competent. That’s how licensure, appointment and continuing education attempts protect the public, both in the world of medicine and life insurance. The WCI can be snarky and entertaining, but that doesn’t excuse his overt lack of knowledge, competency or expertise when it comes to Whole Life insurance. This absence makes his opinions on the subject, at worst useless, but potentially seriously harmful to his adherents.

And just like you would never think of taking your bleeding child needing emergency attention to a life insurance agent for care, you shouldn’t trust your financial future concerning what kind of life insurance you will need, both now and in the future, to an ER doctor, or anybody else for that matter, who isn’t, proficient and competent enough to properly educate and inform you about all the intricate details that could benefit or harm your financial future concerning the ownership of Whole Life insurance. Competency and proficiency are important because they overcome bias and subjective opinions. That is as true in medicine as it is in life insurance.

Dr. Tomas P. McFie

Footnotes:
[i] Debunking the Myths of Whole Life Insurance Part 6
[ii] Ibid
[iii] Ibid
[iv] Journal of Clinical Pathology
[v] Debunking the Myths of Whole Life Insurance Part 6
[vi] Ibid
[vii] Winning Your Financial GAME
[viii] Debunking the Myths of Whole Life Insurance Part 6
[ix] Ibid