Lately on LinkedIn, I've been getting a ton of financial professionals questioning me for suggesting that whole life insurance is not a good “investment” for 99.9% of doctors. But, and Upton Sinclair famously stated, “It is difficult to get a (wo)man to understand something, when his salary depends on his not understanding it.”

But rather than just toss this aside, I want to make sure that I lay out the points that lead me to the conclusion that whole life insurance is just not a good deal for doctors. Because, packaged, sold, and promoted in a certain way, it can seem like it is.

Let's dive right in.

The bottom line, first

I'm going to lead with my conclusion just so it is very clear.

Whole life insurance is a product that is “insurance” first and “investment” second. And, to be fair, it does do both of those jobs. It's just that there are other better, cleaner, and cheaper ways for doctors to insure and invest on the way to financial freedom.

And those should be used first in all cases, which means that whole life is not necessary for 99.9% of doctors. And we will discuss the 0.01% that it can be good for coming up.

But first…

Why whole life insurance is a bad deal for doctors

I think the best way to address this is to point out the main disadvantages of whole life while also providing the counterpoint to all of the potential advantages promoted by salespeople.

1. It's very expensive

With any life insurance, you pay annual premiums. With whole life insurance, the majority of the early premiums go towards costs including commissions and internal costs instead of towards growth. That's a problem if you are using it as an investment.

In fact, the “break-even” point of when the value of your whole life policy can be equal to what you have paid for it can be many years, even a decade. You wouldn't tolerate that in any other investment you make.

2. You can get better investing returns elsewhere

Since early premiums go mostly towards costs rather than growth, long term returns usually lag behind alternatives, like index funds. Said more simply, you'd be better off taking the money you used towards whole life premiums and investing in index funds than paying the whole life premiums.

The main things that whole life salespeople are going to say in response to this is:

• Their policy or company can get higher returns, and
• A whole life policy provides more stability than the stock market

And my responses are:

• Illustrated returns are not guaranteed returns,
• You have to pay a whole lot of money for this perceived “stability,” and
• Which is it? Does whole life give higher returns or greater stability? If it does both that defies the basic investing premise that higher risk is rewarded with higher potential returns…

3. There is a much better alternative to protect loved ones

What is the point of life insurance? The point is to provide money for dependent loved ones if you die unexpectedly.

And term life insurance does a great job of doing just that. With term life insurance, you pay a (smaller) annual premium for a set number of years (usually 30). And if you die in that time period, your dependents get a lump sum of money (mine is $3 million). After the term of the policy, they get no money if you die. But thankfully, you should have reached financial freedom by then and they are all set anyway.

Whole life pundits will liken paying for term to throwing money away in the case that you outlive your policy (and I hope you do). But you didn't waste your money. You spent it serving a purpose – to insure against your death. And you didn't throw bad money after good money by trying to mixing investing with insurance.

So, at this point, we've established that whole life is a very expensive way to insure yourself against early death and a worse investment than alternatives. That right there is enough to say no for most doctors. But let's keep going…

4. Poor liquidity

Liquidity can be important. Especially for doctors who may need money for:

• Practice buy-ins,
• Real estate,
• Student loans,
• Career transitions, or
• General life events

Investing in a taxable, or even some tax advantaged, accounts allow you access to your invested money if you want or need it.

In contrast, the cash value of whole life insurance is policy dependent and constrained. It's not easy to access your early contributions. And, even if you can, you may be subject to significant charges for surrendering your premiums or policy.

5. The “tax free” fallacy

A huge selling point of whole life insurance is that it gives you access to “tax free” withdrawals. But this is really facetious at worst and a deceit of omission at best.

When we hear “tax free” money, we think that the money we withdraw from an investment is not going to get taxed. Like any withdrawals from a backdoor Roth IRA. But that is not what actually happens with a whole life policy.

The way you access “tax free” money with a whole life policy is via loans against the policy. Since the money is from a loan, of course it is not taxed. But there are interest rates of course. It's not free money by any means. And secondly, if you mismanage the loan against the policy it can lead to loss of the policy. And then the money is going to get taxed.

With much better tax advantaged options available to doctors like tax deferred (401k/403b) and tax free (Roth IRA/HSA) accounts, there is just no need to chase such a dubious tax “benefit.”

6. “Infinite banking” is not all its cracked up to be

The ability to access these “tax free” loans is usually called infinite banking in the whole life world. Others will say that whole life allows you to become your own banker. The reported advantage here is that you do not need to use those nefarious banks or other lenders to get access to loans, you can just use the cash value of your own policy.

However, as I laid out above, there are major disadvantages to this. The main one being that you are paying interest to access the money. And imperfect behavior can result in significant consequences.

And even more so, as a doctor you shouldn't be wanting to take on more loans. The goal is to reduce liabilities. And even if you plan on using debt to make money, like with a mortgage on a rental property, why would you want to secure that loan with the cash value of one of your “investments.” It makes no sense. A traditional mortgage is a way better option.

And let's say that some catastrophe happens and you need money for an unexpected life event, you have access to better borrowing options as a doctor including a HELOC, low rate practice loans, or private loans.

Again, not saying that borrowing from your whole life cash policy doesn't work. It does. It's just that better options exist. This is no reason or excuse to make a poor investment.

7. It clouds our better options

Whole life insurance gets sold to young, early career doctors. Why? Because to even make an ounce of sense, whole life needs a long run way to break even and actually have any return. Selling to mid or late career doctors would eliminate any potential selling point.

However, young and early career doctors have way better uses for their money including:

• An emergency fund
• Obtaining own occupation disability insurance
• Paying down debt
• Maxing retirement plans
• Building taxable investments

8. It's complicated for a reason

I've talked to lots of people about whole life insurance. I've talked to doctors defending their decision to buy a policy, salespeople trying to sell to me, and salespeople mad at me for saying doctors shouldn't get it.

After all this, I still haven't gained a really good understanding of what it actually is. Whole life policies have moving parts like surrender schedules, dividend assumptions, paid-up additions riders, and various loan types. That's a problem. If you don't understand an investment or financial vehicle, you should not invest in it.

And if you talk to someone and still don't understand it, it means they either don't understand it or they are intentionally obscuring it because it's an investment that is better sold than bought. Sales tactics obscure the complex reality. Salespeople will often downplay surrender charges, compare whole life to a savings account (not an index fund), emphasize “guarantees” without disclosing low returns, and use projected dividends as if they’re reliable.

Simpler is better.

We now see why whole life insurance is just not a great deal for most doctors. However, to be fair, there are still a few situations where it can make sense. Let's examine those quickly…

3 situations when whole life insurance can make sense for doctors

Here are the 3 times that whole life insurance can make sense for doctors:

• Have a permanent insurance need (estate planning / dependent lifetime care)
• Have very high net worth and need for liquidity at death
• Or have maxed all retirement accounts and want additional tax-deferred growth

I would argue that the first 2 situations are really the main ones. Even if you have maxed out all retirement accounts, there are better ways to minimize your tax burden. And I still would prefer investing in a taxable brokerage account to a whole life policy.

With that said, only a very smaller percentage of doctors are going to fall into the first 2 circumstances. If you have a dependent that will always be a dependent like special needs child, whole life could offer some usefulness. Or if you have an ultra high net worth where you are going to hit against the estate tax, whole life can help protect your heirs from some taxes.

Otherwise, avoid whole life.

The bottom line, again

To reiterate from above, whole life insurance is a product that is “insurance” first and “investment” second. And, to be fair, it does do both of those jobs. It's just that there are other better, cleaner, and cheaper ways for doctors to insure and invest on the way to financial freedom.

99.9% of doctors will come out ahead buying term life insurance and investing their money wisely (here are 11 great ways doctors can invest their money).

So, avoid any fancy marketing or hard sales and keep keeping it simple!

What do you think? Do you have a whole life insurance policy? Are you happy with it? Has someone tried to sell you whole life? Did you understand the pitch? Let me know in the comments below!