9 Reasons You Should Take Another Look at Whole Life Insurance

Document of Life Insurance Policy and calculator, for background
Just a few short years ago, I was staunchly opposed to whole life insurance, because that's what I was taught by national "gurus" 25 years ago. I wholeheartedly believed (as many people still do) that if you need life insurance, you should buy a term policy, then take the difference in premiums between whole life and term and invest it in mutual funds.

So when a good friend of mine sat me down and tried to show me a whole life insurance plan, I nearly refused to listen. Many of you reading this will feel the same way, and nothing I say will change your minds. That's fine -- you're entitled to your opinion just as I was entitled to mine.

Thankfully, my friend showed me how a properly designed whole life insurance policy works. I soon realized that the gurus in my early years and the gurus of today were correct -- based on the information they'd been given. The problem was their information was incomplete.

Whenever I hear a financial consultant (or anyone, for that matter) talk about less expensive premiums for term, I know they really don't understand how this animal of properly designed whole life insurance really works.

With a properly designed whole life insurance policy, you get:

1. Principal protection guarantees of your money.Your cash value isn't subject to market losses, as it is with mutual funds and other programs. When the stock market tanks again (and it's never a question of if but when), you won't lose a dime.

2. Guaranteed growth of your money every year. This will be interest-rate-driven based on the economy, but your account will move forward every year regardless of what the market does. This is compound tax-free growth and not the "average rate of return" you get with mutual funds. To be fair, in our current low-interest-rate environment, the growth rates are only in the 2 percent to 4 percent range but as you study further you start to realize the real wealth is not in the growth rate even when rates go higher.

Many financial advisers will tell you that your money would do better in a good mutual fund. But remember: When someone shows you an "average rate of return," they can start taking that average from any time that benefits their example. This is not compounded growth but rather a factor of timing as to when you enter and exit the market. The stock market has wild swings; if that is acceptable to you, you should have much of your money in stocks. If not, maybe it's time to consider a different way to think about investing. (Remember the period from March 2000 to October 2002, when the Nasdaq lost 78 percent of its value? It's been 14 years since the dot-com bubble started to pop, and the tech-heavy index still hasn't quite recovered to that level. If you like guarantees and stability then you have no business putting most of your money in the stock market.)

3. Dividends paid to policy owners are not taxable. Dividends aren't guaranteed, but many reputable life insurance companies have been in business for more than 100 years and they've paid out dividends every year. The amount of that dividend will depend on several factors, but it boils down to how much profit the insurance carrier made. When properly paid to the policy owner, those dividends are not taxable.

4. A high starting cash value amount, based on what you contribute to the policy. Whole life policies that aren't properly designed will have very little cash value in the early years.
But a properly structured life insurance policy will have high cash value percentages, even in its first year, and they increase every year. This becomes an important fact when you realize that access to your cash will help you grow wealth systematically regardless of market conditions

5. Access to your cash value at any age, at any time, for any reason -- without taxes or penalty. This is a huge benefit of whole life policies compared to 401(k)s and IRAs, which impose multiple obstacles if you want to access your cash before retirement, and penalize you if the funds you borrow from them are not paid back by a certain time and at a certain interest rate. No such obstacles exist with a whole-life policy. So leave your cash in the policy if you wish, or borrow it back out and use it, the choice is yours.

6. The ability to use your account's cash value to recapture lost depreciation on major purchases and interest and fees paid to banks. If you treat this pool of money inside the life policy like your own personal bank, you can loan it out to yourself and others to create wealth. (More on this in future articles, but suffice it to say for now that banking has been around in some fashion for thousands of years. Any business model that lasts that long is worth understanding and using to your advantage.)

7. Guaranteed insurance. Once the policy is in place, your insurance is guaranteed for the rest of your life. Many people assume they'll be able to buy new insurance at any point in their life. But nothing is further from the truth -- especially for those who've been diagnosed with chronic or terminal diseases. If you become seriously ill, don't expect to be able to buy a new policy.

With many whole-life policies, you can add an "accelerated death benefit rider" for little to no cost, which will give you access to a large portion of your death benefit during your lifetime if you have a terminal or chronic illness. I just had a colleague with a client who was diagnosed with Lou Gehrig's disease, or ALS, and was sent a check from his insurer for more than 70 percent of the eventual death benefit. He'll be able to enjoy his remaining time without worrying how he will pay his bills.

8. The ability to combine your life policy with the worlds of real estate, private lending and auto financing to accelerate your wealth, both inside and outside of the policy. Just remember that any funds inside the policy are tax-free for life.

9. Death benefits. In addition to all the benefits you can make use of while you're still here, at heart, this investment is still a life insurance policy, so when you eventually die, there will be a sum of money left behind to your beneficiaries -- tax-free.

There's a reason family dynasties have been using life insurance for generations to grow and protect their wealth. Even when subject to estate limits, these death payouts go a long way toward promoting the tax-free, inter-generational transfer of wealth.

Of course, insurance company policies and riders will vary by state due to state regulations and depending on the actual insurance carrier. But you won't find another type of account or investment that has all these benefits in one investment -- not 401(k)s, IRAs, mutual funds, stocks, bonds, precious metals, real estate, nor any other account.

Tune in next week when I discuss how to create wealth by becoming your own bank.

John Jamieson is the best-selling author of "The Perpetual Wealth System." Follow him on Twitter and on Facebook.

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Saul Mandel

Hi John,

You're overestimating the benefits of whole life. For some clients, mutual funds, VUL, IUL, or but term and invest i equity stock or real estate even, might be their best financial plan.

I'm a licensed Life and Health insurance agent. I help my clients structure their policies with guaranteed limited pay options, (even 5 year limited pay, guaranteed!). Also specializing in building up cash value fast.


You can call/text for a free consultation at (347) 620-1328.

To life!
Best wishes

September 18 2015 at 2:30 AM Report abuse rate up rate down Reply
Michael St

I can't edit some typos I found after I posted. That should read waiver of premium rider.

July 29 2015 at 3:03 PM Report abuse rate up rate down Reply
Michael St

Buy term, and invest isn’t about just getting more for your money now, but preparing you mentally for retirement. I used a quote I was given and compared, and I can save twice as much as the whole life showed in the quotes for cash value over the same time frame. If the policy does as good as the article says, most likely it costs more too which offsets the better rates.

July 29 2015 at 2:57 PM Report abuse rate up rate down Reply
Michael St

As a licensed insurance rep I would like to add some things that this article avoids. I will answer in the order the items are given.
1. You NEVER get the cash if you die. The insurance company keeps it. How's that for guarantee rate of return?
2. You can stick your money in other places, and still get a fixed increase. It might do better in this “Savings,” but unless you cancel your policy you will never get that money. You can tap into it, but I’ll answer that in a minuet.
3. Good feature, but doesn’t do you any good IF YOU DIE. I can’t stress this enough. You NEVER get both money and insurance if you die(Universal option B only). If you separate the two, your guaranteed both if you die. If this is such a good savings place, why don’t you put your whole retirement in there?
4. So, you want me to pay a large sum up front to start this savings. If I die, I just forfeited the whole thing? Sounds legit to me. The article keeps mentioning access to cash, like it’s your money while the policy is in force. As long as it is in force, it’s never your money again.
5. “Access” doesn’t mean “Yours”. It means you can BORROW it. Now, if it is your money why will the policy cancel if I don’t pay it back, even though I’m paying the regular monthly payment? Why is the interest I’m paying on my borrowed money going to the insurance company, at a higher rate than they are paying me? Interest on a loan on 401k goes back to the owner.
6. You’ll have to explain this one to me better. How can borrowing money with interest cover inflation? You work for the governments don’t you…
7. The company I work for guarantees renewability at end of Term. You have several options to keep term going to 95 without it being ART(very high). The terminal issues option is built into our Term policies, with a larger amount available with waiver of benefit rider.
8. Tax free, but not interest free. Unless there is a new policy I’ve not heard about, you can’t just pull money like a savings, and never pay it back. You borrow it like a loan, and must pay it back or risk losing the whole policy. I know of someone who had that happen. They thought paying the regular payment was enough. It wasn’t. Lost what cash value it had plus insurance.
9. You can’t get as much death amount for the money with whole life. So, most people are under insured, because they were told whole life is best. What’s best is what covers them properly for the amount they can handle when it comes to insurance. Most of the time, Term is the only way to do that. So not only are most people underinsured, now they think they are saving money for retirement that they will never see if they need whole purpose of the policy to start with, Life Insurance.
Do you plan to need insurance your whole life? Your planning to have no money? Why pay for 50k whole life for the rest of your life if you have 500k or 1 million in savings?

July 29 2015 at 2:56 PM Report abuse rate up rate down Reply
Lorin Chane Partain

glad to see some common sense regarding whole life, keep up the good work.

June 14 2015 at 5:38 PM Report abuse rate up rate down Reply

Based on this information, it would appear this strategy could be a great deal more sound than buying term insurance and investing the rest in mutual funds for these reasons:

1. When you withdrawal money, it is tax free. If you had your money in a mutual fund based 401K, the returns may be higher but those returns will be taxed which must be considered as a factor
2. From my understanding, the fees on these types of policies are paid up on the front end. With a mutual fund, you have a management fee of 1 + % yearly as your money grows, the fees grow.
3. You can borrow from the policy for larger purchases paying yourself back interest on the loan while your money still has the same dividend earning power pre-loan. Not to mention the paid up life insurance benefit.

So in this type of insurance based investment strategy, your money is guaranteed not lose and may grow.. The average dividend appears to be at a 4 - 5% yearly. Fees are paid up front and you have insurance for life. There are no taxes or management fees as in mutual funds AND you can access your money at anytime tax free.

Both taxes and fund management fees need to be considered when deciding between the two strategies.

You could earn 10% in a stock market based mutual fund retirement strategy but what does the instability, management fees and ultimately taxes you will have to pay turn that 10% into??

This seems like a no brainer...what have I missed?

March 16 2015 at 6:16 PM Report abuse rate up rate down Reply
Kevin Wenke

There are several incorrect statements in this article that readers need to know.

3) "Dividends are not taxed" - The fact is that they could be if they are received while the insured is still alive and the total amount of dividends received exceed the total amount of premium the policy owner paid. If the dividends are received in excess of the premium paid, then they are taxed at the owner of the policy's marginal tax rate.

The dividends can be received tax deferred above basis in the form of a loan. As long as the policy stays in force and a death benefit is received by a beneficiary, then the loans will never be taxed. However, if the policy lapses and the policy is surrendered, then all loans above the basis that are outstanding will be taxed at the marginal tax rate.

5) "Access at any time" - Usually yes, contractually the insurance company has 6 months.

6) "Recapture Lost Depreciation" - Not true, it is a loan and the money removed from a policy to make purchases isn't earning. The loan repayment is lost interest earned from the policy. read this http://tinyurl.com/q7oagup

8) You said again life insurance is always "tax free". The cash value is tax deferred with collateralized loan privileges. The death benefit is always 100% income tax free. If the loan is outstanding at death, then it is used to pay off the loan "tax free" even if money was received over the basis. However, if the policy lapses, the cash received by a policy owner above the basis is taxed.

Life insurance is a great product and I feel everyone should own it. I feel it is important for agents to be specific about what it does and how it works to combat the negative publicity it gets. Even some of the comments on this post have people that didn't know what they bought or had it oversold to them.

You have some good points in the article. Whole life (and any form of fixed life insurance) will not lose value due to market loses. The interest rate risk to the policy owner is retained by the insurance company so that the value will not fall. However, the return inside of the product is based on a fixed income portfolio that the insurance company uses. Insurance companies are investment banks that buy corporate debt, mortgages, Limited Partnerships and other income producing assets.

However, an investor should not 100% avoid exposure to the stock market. There are ways to manage the risk of catastrophic losses during any time period and still have upside. As a matter of fact, Whole life is the best tool to help accomplish this.

September 11 2014 at 9:17 PM Report abuse rate up rate down Reply

So, I am confused by #2. If a traditional whole life policy isn't tied to the stock market and, as stated in #3, dividends aren't guaranteed to be paid out every year; then how is growth guaranteed?

July 19 2014 at 11:03 PM Report abuse rate up rate down Reply
1 reply to john.smith1014's comment

Dividends don't grow, you can just think of it as money that the insurer did not use, so they are returning it to you. It's your own money that you are getting back, because after paying out benefits and overhead and other costs, the insurer has money that is "unearned". Growth is guaranteed in cash value, which is not the same as dividends. Not all whole life policies have cash value, some of them just have face value. (e.g, $250,000). If you have a policy that has cash value, some of them have guaranteed growth. You must be careful about the policy you choose, and make sure the agent is not making it seem like there is a guaranteed growth of a certain amount when it actually doesn't. You can not go by illustrations, they are just projected numbers. An honest agent will tell you exactly what growth certain policies GUARANTEE, as long as you are able to keep up with the premium payments.

December 03 2014 at 1:54 PM Report abuse rate up rate down Reply
Jason Kushner

Good article. Check out this insurance comic/joke involving Whole Life Insurance:


July 17 2014 at 2:52 PM Report abuse rate up rate down Reply

I have a whole life policy from northwest mutual. After 3 years of owning the policy, I was surprised to see that the cash value of the policy is actually greater than the illustrated value, due to high dividends. I ran the math on the illustrated numbers and determined that if I had invested my premiums into a mutual fund, it would be equivalent to a fund netting around 5-6%/year pre-tax. Sure you can do better than that in the stock market, but the "safety" of the whole life policy is alluring for more risk averse people. My plan is to convert the policy into an annuity when I retire, or something similar.

However, I also fully contribute to my company's 401k and my HSA; I would prioritize these first (and Roth if you are eligible). After these, a whole life policy may make sense, if you, like me, are more risk averse and don't want to play with the stock market. As it is, my 401k is in the stock market, so I would prefer to have investments that are not similar for some balance.

June 06 2014 at 2:09 PM Report abuse +1 rate up rate down Reply