fbpx

Avoid whole life insurance – what to do instead

Who would benefit from this post? Share here:

Share on facebook
Share on linkedin
Share on twitter
Share on whatsapp
Share on email
Expat-whole-life-insurance-avoid

Join my Expat Investing Academy and take control of your money! Learn how to plan, save and invest by yourself, so you can reach Financial Independence faster than you every thought possible. Beginners welcome.

“Every attendee that I’ve spoken to has loved Steve’s course.” – Andrew Hallam, author of Millionaire Expat
“This course literally saved my marriage.” – Nisha, expat      “One of the highlights of my 2020.” – John, expat
“The best course on investing for expats. I sincerely recommend it to everyone.” – Elena, expat
“Incredibly helpful, this is exactly what I needed.” – Julia, expat

 

Quick summary: whole life insurance plans have always been controversial globally. They exist mainly to make the insurance company and their sales ‘advisor’ lots of money. You must avoid them, consider escaping from them and warn other people, as there is a slick marketing machine designed to part you from your cash…

Spotting toxic products

There are many tasty mushrooms growing in the forest (maybe not in the desert!) but if you eat the wrong one you are going to feel extremely bad. Insurance products are the same, except it may take many years of paying premiums before you realise you have been poisoning your finances.

Life insurance is definitely useful, especially if you have young children and don’t have a high net worth yet (being what you own minus what you owe).

It’s important to understand that there are two types of life insurance:

Term life: simple, cheap, does the job until your children are grown up and you have some decent investments.

Whole life: complex, expensive, mixes insurance and investing, designed to give huge sales commissions to advisors, which is why they are so desperate to sell it to you.

When Hong Kong banned upfront commissions for the sale of whole life products, their sales volumes went down 76% in one year. So clearly they were being sold for the commission, not because they are useful.

It’s not just me saying this by the way, here’s The Guardian (UK) calling whole life plans ‘expensive and worthless’.

What’s the difference?

Term life is similar to car or health insurance. You pay the same premium (e.g. $100) every month and your beneficiaries get a large payout (called a death benefit) if you die. The policy runs for a fixed period of time, after which you stop paying premiums and are no longer covered. You can stop paying at any time – you just lose the coverage.

Whole life premiums are maybe 3-10x higher and they get ‘invested’. There are many different varieties, depending on what regulators let them get away with, but in theory you are ‘covered for life’. So even if you die at 88, your beneficiaries still receive a death benefit payout. Also if you decide you want the money in your retirement rather than a death benefit, you can take out your savings.

It sounds good, especially the idea that you are investing money for your future rather than just handing over a premium. Not dying after paying 10 years of term life premiums can feel like renting a house for 10 years – money down the drain. You probably did the right thing though and, hey, you’re still alive!

How the wheels fall off the whole life bus

Insurance and investment should not be mixed. The resulting Frankenstein’s monster is complex, unpredictable, hard to get out of and, of course, has endless hidden fees and penalties hidden in a book of terms and conditions.

These products are sold on commission – which is why you got your ‘free’ consultation with the friendly advisor and why they were always phoning you up. Everything you pay in the first 18 months (and yes that’s a lot) is going to go towards that commission, marketing expenses and profit for the insurer. So you are never going to get it back.

The clever trick is in making sure you don’t realise this. They have many years to show you some bs accounts making it look like your money is growing, even if they took it all upfront. Except if you stop paying in and try to take your money out. Then there is a big surrender penalty because… well, that money above the surrender value was never yours in the first place once you paid it in.

 

Dead Simple Saving 3 Steps to Expat Financial Independence Investing Vanguard iShares Transfer

Get started with my free guide:
3 Steps to Expat Financial Independence

15-minute read. Discover the simple process for taking control of your finances so you never have to stress about money again.

The surrender value is the actual value of your policy.

The money invested in your whole life policy attracts very high fees and charges, many of which are hidden. So it is not an efficient way to invest. Often your money is put into exotic funds, such as an Asia Pacific small companies fund, which has high management charges of 1-2% and, guess what, pays a trail commission back to your advisor.

The total charges can stack up to as much as 4% or more per year. If that doesn’t sound much, you can expect to make 7% per year in the stock market over the long term, so you are losing 60% of your annual profits. Over the years, that can add up to hundreds of thousands of wasted dollars. This is the biggest problem with whole life and it wipes out all other perceived benefits.

If you try to exit, you will get hit with a big penalty. If you half-ass your exit with a ‘max partial surrender’ then any remaining investments will get eaten by fees even faster, so you might as well have exited. If your policy doesn’t pay out unless you both die, then the surviving partner won’t benefit at all if you die. If your policy doesn’t grow sufficiently over time, the life company may hike up your premiums or reduce your death benefit.

As whole life premiums are much higher than term life ones, they can be a real strain if you suddenly can’t afford them anymore. Stop paying early and you’ll quickly end up with a big mess.

What to do instead

It’s just not worth it. Neither is the pain of continuing to deal with companies trying to bamboozle you into sticking it out forever so their profit streams are safe. Maybe stick some more in while you’re at it. Often, if you’re below 50 with no health issues, a clean break is best – rip the band aid/plaster off and learn from your mistakes.

What’s the smart alternative? Buy term life insurance for e.g. $100-200 per month and then invest the $800-1900 extra (which you would have paid into a whole life policy every month) into the stock market yourself.

By the time your policy stops at say 55, you will have grown a large investment portfolio with super-low fees. So if you die unexpectedly, your other half and family will be just fine.

The sad fact is that whole life policies are not ideal for 99% of expats. Insurers and most advisors have a vested interest in denying this till they are blue in the face.

Endless excuses

Typical excuses to entice you in and then keep you in might include:

You’ll get nothing back from term life after the end of the policy or if you decide to stop paying. And you won’t be covered in old age. Except you’re going to have a nice big investment portfolio that you grew safe from their clutches.

 A whole life policy is a tax-efficient investment for when you return to your home country. Hmm usually the high fees far outweigh any tax benefits. No country taxes you at 60% of your annual profit, right? Plus many governments take a pretty dim view of offshore insurance schemes and your finances immediately become EXTREMELY complex to untangle by tax experts (who are not easy to find).

You get access to investment funds and other products that you can’t otherwise invest in. Yep, the ones that pay you the most commission and have a track record of blowing up spectacularly. You don’t have to ask too many expats before you find a depressing case study.

You can’t just write off an entire industry. Er… tobacco?

If you don’t save your money into this policy, you’ll just spend it. Maybe you will. But surely it’s time to put on your adult pants, deal with your spending problem and take control of your finances yourself.

Time to take back control

Realising you have been suckered into a terrible long-term financial product can be painful and confusing. If you are struggling with this, reach out to me, Conor (below), AES International or The Fry Group. Use this pain to turn things around and never look back.

Next time I’ll talk about how to buy term life insurance in the most efficient and effective way. If you can’t wait that long, talk to Conor O’Shaughnessy at expatfs.com. As one of the few advisors who has always refused to sell whole life insurance, he really stands out as someone to trust. I don’t get even a penny for recommending him or these other companies, just the satisfaction of knowing you are in safe hands.

It makes me sad that smart, young people work hard to get qualified and then start flogging awful products for commission, egged on by Teflon-coated advisory companies pushing them hard with targets. But that’s the world we live in. Stick to simple products that don’t pay out commission and learn how to manage your own finances. You will avoid a whole lot of pain and feel much better for being in control.

Any questions or comments? Add them below…

Image credit: MCWILLIAMS

Join my Expat Investing Academy and take control of your money! Learn how to plan, save and invest by yourself, so you can reach Financial Independence faster than you every thought possible. Beginners welcome.

“Every attendee that I’ve spoken to has loved Steve’s course.” – Andrew Hallam, author of Millionaire Expat
“This course literally saved my marriage.” – Nisha, expat      “One of the highlights of my 2020.” – John, expat
“The best course on investing for expats. I sincerely recommend it to everyone.” – Elena, expat
“Incredibly helpful, this is exactly what I needed.” – Julia, expat

 

Who would benefit from this post? Share here:

Share on facebook
Share on linkedin
Share on twitter
Share on whatsapp
Share on email

Join Our Community

Get our articles first – practical and memorable advice on saving your money and avoiding financial pitfalls.

We won’t share your email with third parties and will never spam you.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

{"cart_token":"","hash":"","cart_data":""}