What a title huh? I bet it got some people’s attention. I’ll explain:

Whole life insurance, IUL, being your own bank, and whatever other fancy names Wall Street has come up with for a life insurance policy with an investment component, is generally a bad idea for most people.

To be fair, there are some people who definitely can benefit from these – mostly multi-millionaires and people with closely held businesses, but that’s probably not you, is it? Unfortunately, the vast majority of the people who get sold one of these policies do not need it and would have been better off buying term life insurance and investing the difference.

For one thing, these policies are expensive. They sell them as a generational wealth creator, but the fees are horrendous. Pretty much the entire first year (or three) of premiums lands in the pocket of the salesman. Similar to a front load fee on a mutual fund. Other more experienced and wealthier readers of this blog may have other opinions I’d be happy to hear, but for me, that’s to be avoided.

Second, the ongoing fees are high. Think a mutual fund with an exorbitantly high expense ratio. You think your hundreds or thousands of dollars in monthly premiums are getting invested, and some of them are, but far less than you’d expect. It takes about 15 years to BREAK EVEN on one of these policies. You could have tripled your money in that time by purchasing term life insurance and investing the remainder.

Third, premiums can go up over time. You didn’t know that, did you? Neither did this 72-year-old woman who was left upset and broken after paying into her life insurance policy for 36 years only to get notice it would soon terminate and pay out nothing. (Read the article here)

When you have a whole life policy, the monthly premiums you pay first cover the cost of insurance, which, as mentioned can go up over time if the insurance salesman puts you in the wrong policy (and you better believe they will if it means more money for them). Anything left over gets invested. If the cost of insurance exceeds the premium amount, they start taking it from your cash value until one day there’s nothing left and they close your policy. What a scam, huh?

These insurance policies are incredibly lucrative to the insurance industry, which is why life insurance salesmen push them so hard. Details will often be omitted to get people into one of these. The largest disclaimer I hear over and over again is “if properly structured.” Data and timelines are cherry picked to make it look like they outperform the market – which is impossible to do consistently.

If you were sold one of these policies and aren’t sure whether it’s benefitting you, I’d say get out. Stop the financial bleeding, get whatever cash value you can, and try not to think of the sunk costs.

I got my wife out of one of these that she had been paying into for 8 years. Total contributions had been something like $11,000. Total cash value was like $5,000 when we pulled it out. Yes, we lost money, but it was better to just stop the bleeding before we lost any more money. We never looked back, and we’re millionaires now. Avoid these garbage policies and invest for yourself.

tl;dr: Buy term and invest the rest.

P.S. I don’t personally know a single millionaire who has, or would recommend, whole life insurance. Not that I know that many millionaires, but it’s pretty telling, isn’t it?

Jeremy from Personal Finance Club wrote a very detailed exposé of IULs and it’s certainly worth a read: https://www.personalfinanceclub.com/is-iul-a-scam-yes/