The upsides and downsides of investing in whole-life insurance, and how to choose a better coverage option

Question:

My financial adviser thinks I should diversify my portfolio by adding whole-life insurance (WL) as an additional asset class. Do you think this would be a good move?

Answer: WL is difficult to sell. It is expensive and complicated and possesses a terrible reputation. It is rarely recommended except by those who benefit from its sale. Recognizing this, insurance companies offer substantial commissions to those who are able to successfully sell it. The typical commission for WL ranges from 50–110 percent of the first year’s premium. That means if you buy a WL policy with a premium of $30,000 per year, your “adviser” will receive a commission in the neighborhood of $15,000–$33,000. Given that insurance agents have a median income of $47,000 per year, that monstrous commission becomes an incredible conflict of interest.

Commissioned salespeople generally make for poor financial advisers. The worse the financial product, the higher the commission a company must offer in order to get it sold. The higher the commission, the more likely the salesperson is to recommend it to you. Even highly ethical people will struggle with this insanely huge financial conflict of interest. It kind of makes those pens and sandwiches that drug reps used to bring to the ED look pretty silly, no?

If you need financial planning advice, I suggest you pay for it with a straightforward hourly or flat fee. If you need asset-management services, I suggest you pay for it with a flat annual retainer or at least a reasonable fee based on assets under management. Using a commissioned “adviser” may seem like it saves you some money, but there is no price too low for bad financial advice.

It is best to evaluate any financial product on its own merits rather than on the sliminess of its industry.

All that said, it is best to evaluate any financial product on its own merits rather than on the sliminess of its industry. WL does have significant upsides. It provides a lifelong, generally increasing death benefit. The life insurance aspect is paired with a savings account that grows slowly each year with dividends from the insurance company. In many states, the cash value enjoys significant asset protection from creditors. It can be useful in some unique estate- and business-planning transactions. You can also borrow money tax-free, but not interest-free, from the policy to purchase expensive stuff or to spend in retirement. Upon death of the insured, any loans not paid off are assessed against the death benefit and the remainder is paid out to heirs. These unique aspects cause commission-hungry insurance agents to recommend WL as an additional retirement account or even as a unique asset class for your portfolio.