I’m not a fan of whole life insurance. But since I continue to hear this absurdity that whole life is the only good option for individuals who are maxing out their 401k and IRA, I brought the financial experts with me in this post.
Whole life is not your only investment option if you’re maxing out your 401k or can’t contribute to an IRA. Especially if you don’t even need life insurance!
Please consider the following prior to spending a penny on whole life insurance!
401k Alternatives to Consider Before Whole Life
If you haven’t already done so, I would first go to a CFP and offer them a fee to look at your entire financial plan before speaking to any agents about whole life.
Remember commissioned salespeople generally make for horrible financial advisors since they’re hopelessly biased toward selling their OWN product first.
CFP’s, such as those at AIO Financial, are not only responsible but have a fiduciary duty to tell you what’s best for YOU.
I’m most comfortable recommending fee-only ones since they aren’t compensated by which investment you choose.
Here are a few alternate investment ideas I would discuss with a CFP.
(Note: These are written for a W2 Employee in mind.)
#1 – Taxable Account
Multiple personal finance experts like Larry Ludwig from Investor Junkie and Eric McClain from McClain Lovejoy Financial Planning will tell you a regular taxable brokerage account is one of your best options.
With long term capital gains at just 20%, this option provides liquidity and flexibility (you can take it out whenever you want) and low expenses.
CFP and NerdWallet contributor Adam Funk, from SavingsCoach.com, says:
Sophisticated investors don’t shy away from taxable accounts. For example, you’ll see them buy and hold Warren Buffett’s Berkshire Hathaway stock for years. It’s liquid if necessary and they don’t pay dividends, so they’re only on the hook for low, long term capital gains tax when/if they sell.
If you’re wondering how a taxable account could possibly measure up to a tax haven like whole life insurance, it’s probably because you’re focusing solely on the tax benefits of whole life.
In reality, the tax benefits aren’t that great considering most people don’t even break even for the first 10 years in whole life. What good is tax-free access to funds that have no gains?
Plus, you shouldn’t just be considering tax benefits.
Todd Tresidder from Financial Mentor says,
It all comes down to mathematical expectancy or net ROI after tax. The fact that an investment has tax benefits is great, but that’s only one aspect of performance! Say a stock is 100% taxable in a non-qualified account, but it has a 50% return. Its ROI is still incredible. That’s why if you’re simply considering the tax benefits of whole life insurance, you’re taking your eye off the ball.
My personal opinion (if you’re not good at valuing companies) is to just invest in a handful of ETF’s that track the major indexes like the S&P 500 (IVV), the Aggregate Bond Index (AGG), and the MSCI Emerging Markets Index (EEM), among others.
You could simply fill out a risk assessment form on a site like WealthFront and instantly see (and mirror) the strategy they would put you in.