Whole Life Insurance: A Doctor's Smart Investment Strategy

Whole life insurance is a type of permanent life insurance that covers you for your entire life, as long as you pay your premiums on time. It is often pitched to doctors, but it is generally not a good idea to buy it. Whole life insurance is very expensive and has low returns. It is also unnecessary for most doctors, who will not need life insurance by the time they are 70 or 80 years old. Instead, doctors should consider buying term life insurance, which is much cheaper and provides coverage for a specific period of time.

Whole life insurance is expensive

Whole life insurance is a costly option. Premiums are fixed and won’t increase, regardless of market conditions. Policyholders can borrow against their whole life insurance policy’s cash value. Your life-long death benefit is guaranteed as long as you make your premium payments. There is a guaranteed increase in cash value, although it is often much less than the projected increases shown to you by the agent selling the policy.

Whole life insurance policies have negative short-term returns and low (2% guaranteed, 5% projected) long-term returns on the cash value. Whole life insurance can be five or even 10 times as expensive as term life insurance during the years when insurance is typically needed. Thus many purchasers who mistakenly buy whole life instead of term life end up dramatically underinsured because they simply cannot afford to get all of the coverage they need as whole life coverage.

You don’t control how the cash value part of your whole life insurance policy is invested; your insurance company does. The dividend rate and thus the return on the cash value is essentially a black box.

Whole life insurance is not a good option for doctors. There are some exceptions for when a whole life insurance policy is a viable option, but being a doctor does not count as one of those exceptions. Most doctors don't need it. However, it can make sense to have whole life insurance for some specialized estate planning and business purposes. Additionally, whole life insurance might work well for someone who’s willing to sacrifice higher investment returns in exchange for lower but guaranteed returns, a death benefit, and possibly significant asset protection in some states. Others that highly value the ability to borrow money at pre-set terms from the policy (Bank on Yourselfers and some types of real estate investors) may also find value there.

It's not a good investment

Whole life insurance is not a good investment for doctors. Here are some reasons why:

High Commissions for Agents

Insurance agents receive huge commissions for selling whole life policies, ranging from 50% to 110% of the first year's premium. This incentivizes them to sell whole life policies even when they are not in the best interest of the customer. Agents have no fiduciary duty to their clients and are mostly trained in sales, not financial planning or investment management.

Low Returns

Whole life insurance has low returns, with guaranteed returns of 2% per year and projected returns in the 4%-5% range on the cash value. These returns are much lower than what you could get by investing in the stock market or other investment options.

Life Changes

Purchasing a whole life policy is a long-term commitment, but life circumstances can change. What seemed like a good idea when you first bought the policy may no longer be suitable in the future. Unfortunately, life insurance lapse rates are high, with nearly 80% of people surrendering their whole life policies before death.

Better Uses for Your Money

Doctors often have better uses for their money, such as paying off credit cards, student loans, or a mortgage. They may also have underfunded retirement accounts or children's college plans. Investing in whole life insurance may not be the best use of their limited financial resources.

Not Needed for Most Doctors

Most doctors do not need whole life insurance for their entire lives. Once they reach financial independence and their children are adults, there is usually no longer a need for life insurance. Term life insurance, which provides coverage for a specific period, is usually sufficient for doctors' needs.

Alternative Options

There are alternative options available, such as term life insurance, which is much more affordable and provides coverage for a set period. Permanent life insurance, such as whole life or universal life, is often unnecessary and more expensive.

You can get better returns elsewhere

Whole life insurance is a variation of permanent life insurance. With a whole life insurance policy, you’re covered for your entire life as long as you pay your premiums on time.

Like a term life insurance policy, whole life is a contract between you and your insurer. You pay a monthly premium, and your beneficiaries receive a payout after you die.

A difference is that whole life insurance policies acquire accessible “cash value” as the years go by. This cash value is yours to keep if you surrender the policy. Alternatively, you can borrow against it from the insurance company at pre-set terms. That loan, if not paid back prior to death, is subtracted from the cash value at death. The cash value grows via dividends in a tax-protected way. Sometimes policyholders can pay more than their premium (i.e. paid-up additions) to create additional cash value.

Whole life insurance policies have negative short-term returns and low (2% guaranteed, 5% projected) long-term returns on the cash value.

Whole life insurance can be five or even 10 times as expensive as term life insurance during the years when insurance is typically needed. Thus many purchasers who mistakenly buy whole life instead of term life end up dramatically underinsured because they simply cannot afford to get all of the coverage they need as whole life coverage.

You don’t control how the cash value part of your whole life insurance policy is invested; your insurance company does. The dividend rate and thus the return on the cash value is essentially a black box.

There are some exceptions for when a whole life insurance policy is a viable option, but being a doctor does not count as one of those exceptions. Most doctors don't need it. However, it can make sense to have whole life insurance for some specialized estate planning and business purposes. Additionally, whole life insurance might work well for someone who’s willing to sacrifice higher investment returns in exchange for lower but guaranteed returns, a death benefit, and possibly significant asset protection in some states. Others that highly value the ability to borrow money at pre-set terms from the policy (Bank on Yourselfers and some types of real estate investors) may also find value there.

Whole life insurance is frequently inappropriately sold to doctors and high-income professions. Whole life insurance does four things:

Provides a death benefit in case you die while someone else depends on your income, but it is a very expensive way to provide that protection.

Provides a death benefit when you die even if no one else depends on your income, such as in your 70s or 80s. This is unnecessary insurance.

Accumulates a cash value that you can borrow against. While there are a number of uses for this cash value, it is generally inferior to other options that can accomplish the same purpose.

Whole Life Insurance has some unique business and estate planning uses you are unlikely to need.

Insurance agents receive their training primarily from their insurance company, and that training is mostly in sales, not financial planning or investment management. They have no fiduciary duty to you and receive huge commissions if they successfully convince you to purchase a policy. A typical commission for a cash value life insurance policy ranges from 50% to 110% of the first year's premium. So if you buy a policy with a $4,000 monthly premium, the agent was paid something like $25K-$50K to sell it to you. In short, you cannot trust the recommendation of an insurance agent about whether or not you should purchase a whole life policy.

Whole life insurance advocates (usually insurance agents) often describe “ideal” policies that pay lower commissions and have slightly higher returns than other policies. However, my readers and I seem to run into “non-ideal” policies about 99% of the time like these crummy, inappropriately sold ones that seem designed to maximize the agent's commission. There are generally four main reasons why whole life insurance is a bad idea:

#1 You Have Better Uses for Your Money

So many of the docs I run into who own whole life insurance owe on credit cards, student loans, or a mortgage. They might not even know about retirement accounts available to them such as a Backdoor Roth IRA or a Stealth IRA. They probably aren't maxing out their 401(k) and perhaps haven't even established an individual 401(k) for their moonlighting gig. Sometimes they aren't even getting their employer match on their retirement plan! Their children's college plans are also probably woefully underfunded. In short, they have something else with a better return and better tax benefits available to them. As my income rises through the tax brackets, I keep thinking I'm going to run into a situation where cash value life insurance makes sense for me. But even with a 7-figure income, I still seem to keep finding better uses for my money! What are the odds that a doctor with an average doctor income doesn't have a better use? Pretty low, unfortunately.

#2 Whole Life Insurance Has Low Returns

If you buy a whole life policy today while you are in your 30s, and hold it until you die, over a period of 50 years you should expect guaranteed returns of 2% per year and projected returns in the 4%-5% range on the cash value. Your actual return is likely to be somewhere between the guaranteed and the projected returns. Remember, the dividend rate is NOT the return on your investment. If I'm going to tie my money up for 5+ decades, I expect a better return than 3%-4%.

The poor returns on whole life are heavily front-loaded. Most policies won't even break even for 10-15 years and due to surrender fees, you may not even get anything you paid back on a policy you surrender after just 3-4 years.

#4 Life Changes, but Whole Life Insurance Doesn't

Purchasing a whole life policy is a life-long decision, like marriage. This is not something you decide on in 20 minutes with an agent masquerading as a financial advisor. You should at least put as much time and effort into purchasing it as you did when you purchased your house. Although you can purchase a “10-pay policy“, it is much more common to

It's not suitable for doctors

Whole life insurance is frequently inappropriately sold to doctors and high-income professions. Here are some reasons why it is not suitable for doctors:

High Commissions for Agents

Insurance agents receive huge commissions if they successfully convince you to purchase a whole life policy. A typical commission for a cash value life insurance policy ranges from 50% to 110% of the first year's premium. So, if you buy a policy with a $4,000 monthly premium, the agent walks away with something like $25K-$50K.

Low Returns

Whole life insurance has low returns. If you buy a whole life policy while you are in your 30s and hold it until you die, over a period of 50 years, you should expect guaranteed returns of 2% per year and projected returns in the 4%-5% range on the cash value. Your actual return is likely to be somewhere between the guaranteed and the projected returns. Remember, the dividend rate is NOT the return on your investment.

Life Changes

Purchasing a whole life policy is a life-long decision, like marriage. Unfortunately, life changes, and what seemed like a good idea when you committed to it, no longer seems so. This usually means that the policy ends up performing even worse than the original illustration.

High Lapse Rates

Nearly 80% of people who purchase a whole life policy (meant to be held for your entire life) surrender it prior to death. It takes 5-15 years for a typical whole life policy just to break even to where your surrender value equals your premiums paid (not counting the time value of money or inflation).

Better Uses for Your Money

Many doctors who own whole life insurance owe on credit cards, student loans, or a mortgage. They might not even know about retirement accounts available to them such as a Backdoor Roth IRA or a Stealth IRA. They probably aren't maxing out their 401(k) and perhaps haven't even established an individual 401(k) for their moonlighting gig. Sometimes they aren't even getting their employer match on their retirement plan! Their children's college plans are also probably woefully underfunded. In short, they have something else with a better return and better tax benefits available to them.

It's often inappropriately sold to doctors

Whole life insurance is often inappropriately sold to doctors, and high-income professionals, by insurance agents who are incentivised by the high commissions they receive for selling these policies. These agents masquerade as financial advisors, but they have no fiduciary duty to act in the best interests of their clients. They are trained in sales, not financial planning or investment management.

Doctors are often targeted by insurance companies looking to sell whole life policies and make a quick buck. Whole life insurance is designed to be sold, not bought. It is pitched as a great investment opportunity, but there are better ways to invest. The average return on the cash value portion of a whole life policy is somewhere between 3-4% – far below the S&P 500, which has earned 10% since its inception.

Whole life insurance is a variation of permanent life insurance. With a whole life insurance policy, you’re covered for your entire life as long as you pay your premiums on time. Like a term life insurance policy, whole life is a contract between you and your insurer. You pay a monthly premium, and your beneficiaries receive a payout after you die. Whole life insurance policies also acquire accessible "cash value" as the years go by. This cash value is yours to keep if you surrender the policy. Alternatively, you can borrow against it from the insurance company at pre-set terms. That loan, if not paid back prior to death, is subtracted from the cash value at death. The cash value grows via dividends in a tax-protected way.

Whole life insurance policies have negative short-term returns and low (2% guaranteed, 5% projected) long-term returns on the cash value. Whole life insurance can be five or even 10 times as expensive as term life insurance during the years when insurance is typically needed. Thus many purchasers who mistakenly buy whole life instead of term life end up dramatically underinsured because they simply cannot afford to get all of the coverage they need as whole life coverage.

You don’t control how the cash value part of your whole life insurance policy is invested; your insurance company does. The dividend rate and thus the return on the cash value is essentially a black box.

There are some exceptions for when a whole life insurance policy is a viable option, but being a doctor does not count as one of those exceptions. Most doctors don't need it. However, it can make sense to have whole life insurance for some specialized estate planning and business purposes. Additionally, whole life insurance might work well for someone who’s willing to sacrifice higher investment returns in exchange for lower but guaranteed returns, a death benefit, and possibly significant asset protection in some states. Others that highly value the ability to borrow money at pre-set terms from the policy (Bank on Yourselfers and some types of real estate investors) may also find value there.

Frequently asked questions