Are you one of the lucky, smart individuals that have made a very wise decision to secure some level of Whole-Life insurance? Not just any type of permanent life insurance protection, I am specifically referring to “Whole-Life” from one of the remaining top-rated, 150+ year-old and still “mutually owned by the policy holders” life insurance companies. Specifically “dividend-paying” whole life insurance (not Universal Life (UL) or Indexed UL, or Variable UL, or Guaranteed UL). Well if you do “own” this hidden gem (golden asset class) in your portfolio, and have experienced its growth in value with zero losses, then allow me to offer my congratulations to you for investing in this uniquely designed financial tool for its long-term value to both you and your loved-ones, and to strongly advise that you keep it on your balance sheet forever. Never let it go, trade it in, or allow anyone to ever suggest replacing your whole-life contract for something “better” unless it’s guaranteed to perform better and verifying all of the pro’s and the possible pitfalls.
It’s a valuable asset class, not just a death benefit…
What I know to be true is that the vast majority of traditional financial advisors (asset managers), and the general public, have bought into and adapted the concept/mentality of a “buy term life and invest the difference” strategy. Have you heard or received that advice personally? This rationale assumes that an income producing person, with loved ones to protect buys “cheap” term life insurance and saves/invests the difference between what funding a permanent life insurance policy would be, and the price of term-life premiums on a regular basis until; a) they have accumulated enough assets to replace the life insurance “need” or b) they retire and no longer have a “need” for life insurance. Reality is that a very high percentage of income earners remain well under protected against a loss of income from death or disability and are not saving/investing enough to come close to being able to retire with a similar lifestyle as they have while working. You see the typical financial planner/advisor is the stocks & bonds broker/money manager and in the business of getting you to invest (assets under management), “hoping” for a better long-term rate of return, but with zero certainty or assurance, and they typically do not advise on anything in the protection world nor do they truly know or understand “actuarial science” (believe it or not). On the other hand, I have been licensed to transact in both insured (guaranteed) products AND securities (risk-based) for my entire career and fully understand the upside & downside of each. Understand, I’m not suggesting this to be an either or (investments vs. whole-life insurance). Each has its place as a specific “asset-class” in a portfolio that can powerfully complement one another during one’s retirement. Whole-life insurance doesn’t react to the economic swings of the markets and offers stability & leverage within a portfolio.
Please know, I also recommend, underwrite and place large amounts of term-life insurance to further protect a client’s income, and I do know that it has a very significant place in most properly designed financial plans, as you can secure large amounts of pure term-life (temporary) protection for a much lower cash-flow consideration. However, you need to also know that term insurance is outlived 98% of the time. It is a wonderful tool for protecting one’s income, during their earning years only. You just need to plan for it not being there to deliver a large block of cash to your heirs when you die.
Expensive or no cost?
In the middle of the 19th century a life insurance product was created by Mutual Life Insurance companies. It was called whole life. It provided the guarantee of cash values, premium and death benefit. It also had a non-guaranteed growth element called dividends and some of these mutual companies have paid a dividend every year since their existence. There are only a handful of mutual life insurance companies remaining that haven’t changed their structure and time-tested investment philosophy, primarily in fixed income. Whole life insurance has many features and benefits that, when properly understood, makes it (in my opinion) one of the best “long-term” and safest places to grow your money, with an amazing 150+ year track record of only gains and zero losses (if funded properly). Here is a list of its benefits:
- Has a valuable death benefit that is guaranteed to life
- Permanent Death Benefit that’s guaranteed and cannot be outlived (unlike term-life insurance)
- Tax-Deferred Growth (like an IRA/Pension Plan)
- Tax-Free Dividend Distributions
- Tax Free Loans
- Uncorrelated Asset Class – (*does not move with or react to other markets)
- Liquidity (for anything)
- Guaranteed Cash Value (contractual)
- Annual Dividend Distribution (Guardian has paid a dividend every year since 1868)
- Protected from Creditors (lawsuit proof asset)
- Competitive internal rate of return on death benefit and cash values
- Permitted to pay a premium amount above the base premium by adding a rider and not changing the policies taxation
- Never goes down in value (providing there are no loans or withdrawals)
- Provides a forced savings that may be used to help pay for college, economic opportunities, life’s emergencies, etc.
- Extremely powerful leverage tool (to complement other retirement and investment accounts, not in place of)
First and foremost, whole life insurance is intended to provide death benefit protection for an individual’s entire life. With payment of the required guaranteed premiums, you will receive a guaranteed death benefit and guaranteed cash values inside the policy. In addition, the ownership of whole life as part of someone’s financial portfolio helps: reduce risk, provides further diversification and reduces taxes. We can discuss further what benefits ownership of whole life has.
Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. The total dividend calculation includes mortality experience and expense management as well as investment results.
All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
State creditor protection for life insurance policies varies by state. Contact your state’s insurance department or consult your legal advisor regarding your individual situation.