I recently had whole life pitched to me for the second time in my life. There are plenty of threads on this forum that demonstrate near universal hatred for this product from Bogleheads, but I hope I can add a little with this thread by examining the actual numbers more closely.
I am out of tax-advantaged retirement accounts and this product was pitched to me as a fixed income alternative with Roth IRA-like tax status (assuming the properly withdrawal strategy). The death benefit is always larger than the total cash value, but I am ignoring that value. "Why would anyone use an insurance product as a savings product?" you might ask. The answer is that the US tax code provides some inducement to do so.
The policy in question involves investing the same amount for 10 years (though I'm allowed to stop sooner), then never again. The policy is from MassMutual, and the numbers I was given assume a constant dividend payout from now until forever. Starting in year 11 I'm able to calculate that explicit fees by taking the difference between the 6.4% assumed dividend payout and the actual increase in the total cash value of the account.
Here are the results:
![Image]()
The 6.4% dividend is not guaranteed. Certainly someone who saw a presentation like this decades ago when interest rates were at their peak would be disappointed with the nominal returns they received between then and now. But asking that a long-term investment produce guaranteed returns, especially in real terms, is setting the bar very high.
Here's an image showing that Mass Mutual's dividends have roughly tracked interest rates:
![Image]()
By purchasing a whole life policy, I would be making a long-term commitment to receive growth at a variable nominal interest rate. The real interest rate might vary less than the nominal interest rate. So what should I compare this number to? How about the highest point on https://www.tradeweb.com/our-markets/in ... eld-curve/ which is what I might expect to get if I continually turned over short-dated munis for decades, ignoring any term premium? I'm comparing to munis since, if I'm willing to limit myself to my own state, I can get tax-free growth in munis too.
At year 35, when my money has been in whole life policy for 30 years on average, the IRR is 4.88% (maybe not the best for corporate debt, but remember the tax benefit). That's about 1% higher than the highest yielding point on the muni yield curve (the furthest point out). That doesn't sound like much, but the power of compounding makes the difference large: 320% vs. 215% growth in 30 years.
What is the catch then? Perhaps:
I am out of tax-advantaged retirement accounts and this product was pitched to me as a fixed income alternative with Roth IRA-like tax status (assuming the properly withdrawal strategy). The death benefit is always larger than the total cash value, but I am ignoring that value. "Why would anyone use an insurance product as a savings product?" you might ask. The answer is that the US tax code provides some inducement to do so.
The policy in question involves investing the same amount for 10 years (though I'm allowed to stop sooner), then never again. The policy is from MassMutual, and the numbers I was given assume a constant dividend payout from now until forever. Starting in year 11 I'm able to calculate that explicit fees by taking the difference between the 6.4% assumed dividend payout and the actual increase in the total cash value of the account.
Here are the results:
The 6.4% dividend is not guaranteed. Certainly someone who saw a presentation like this decades ago when interest rates were at their peak would be disappointed with the nominal returns they received between then and now. But asking that a long-term investment produce guaranteed returns, especially in real terms, is setting the bar very high.
Here's an image showing that Mass Mutual's dividends have roughly tracked interest rates:
By purchasing a whole life policy, I would be making a long-term commitment to receive growth at a variable nominal interest rate. The real interest rate might vary less than the nominal interest rate. So what should I compare this number to? How about the highest point on https://www.tradeweb.com/our-markets/in ... eld-curve/ which is what I might expect to get if I continually turned over short-dated munis for decades, ignoring any term premium? I'm comparing to munis since, if I'm willing to limit myself to my own state, I can get tax-free growth in munis too.
At year 35, when my money has been in whole life policy for 30 years on average, the IRR is 4.88% (maybe not the best for corporate debt, but remember the tax benefit). That's about 1% higher than the highest yielding point on the muni yield curve (the furthest point out). That doesn't sound like much, but the power of compounding makes the difference large: 320% vs. 215% growth in 30 years.
What is the catch then? Perhaps:
- MassMutual is more likely to default than a municipal issuer (?)
- I can sell a muni (or muni fund) the day after I bought it and do just fine. If my life circumstances change and I need the money sooner than expect, the whole life plan turns into a terrible deal
- Everyone basically understands where bond yields come from, but notwithstanding their track record it's much harder to figure out what's going to happen with MassMutual's dividend. Murphy's Law suggests that the spread between MassMutual's dividend and treasury yields is more likely to shrink than to grow
- It's possible the taxation of whole life insurance will change. Evaluating the likelihood of this is beyond me
Statistics: Posted by jaro — Thu Feb 06, 2025 10:43 pm — Replies 0 — Views 37