9 Reasons You Should Take Another Look at Whole Life Insurance

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Document of Life Insurance Policy and calculator, for background
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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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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
john.smith1014

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
JJ

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:

http://www.agentenews.com/insurance-comics/whole-life.html

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

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
jodukepiryk

If you already own whole life the decision is tougher, especially if you have a paid up policy soon. But for most people looking for insurance term is a clear winner. Whole life is really only necessary for people with estate planning needs. If you want to save, simply buy term and invest the difference in a tax deferred retirement account. I only pay $20/month (from Life Ant) this is about 1/10 of what whole life is going to cost you. Then save the savings for retirement, and live well when your ready.

May 21 2014 at 8:17 PM Report abuse +1 rate up rate down Reply
1 reply to jodukepiryk's comment
JJ

Yes, whole life policies are for people who can afford it. You will a lot of people who hate on whole life because they were sold a policy under false pretense, and then they find out that term is much cheaper. Obviously, if you're not rolling in dough, you should not buy whole life. But if you have money laying around, it's a good way to diversify your portfolio. I believe insurance should never be bought for profit, it's a transfer of risk, and not an investment in the traditional sense of mutual funds and stocks.

December 03 2014 at 1:57 PM Report abuse rate up rate down Reply
chelsea.fox1

Whole life insurance is not a bad thing, but it is only for select few people, it is way oversold in general as a financial product.

My father was a financial advisor, and even though he sold a lot of the stuff he will admit if you pin him down that a lot of people only need coverage until retirement, not their whole lives. By switching to a term policy and investing the difference, you can end up with a considerably higher retirement nest egg, and there is no need for insurance after that.

There are lots of great ways to get cheap term now online. I just got a new policy at this site Life Ant. My husband got one too. Now our kids and we are covered for less than $70 bucks a month FOR BOTH POLICIES. We used to have a whole life policy that we paid over $400 for just my husband every month. I think term is better for most Americans post great recession...

March 20 2014 at 10:22 PM Report abuse +1 rate up rate down Reply
Kevin

Bringing up permanent insurance in an article for the general public is one reason that so many people who need life insurance to protect their dependents don't have it.

Term life is better for no other reason than it is a straightforward product and as such more people will buy it if the industry and certain agents quit trying to sell what will best line their pocket with high commissions.

This lack of coverage in Americans is not because life insurance is too expensive, pretty much everyone can afford it. Visit QualityTermLife's website and take a look at how low rates are right now.

March 06 2014 at 9:59 PM Report abuse +1 rate up rate down Reply
1 reply to Kevin's comment
smithmarc1968

WL insurance is very straight forward. You pay your premiums, you have it for life.

And talk about agents trying to line their pockets, why'd you have to go and plug your company? Of course you think term is better, you're selling it. The more people who think term's better, the more money you make.

March 11 2014 at 12:57 PM Report abuse rate up rate down Reply
wclark8622

As a former, and 10 year holder of a Whole Life Insurance Policy, I can tell you that the "guaranteed growth" of #2 was the reason I cancelled my policy. It wasn't what I was told it would be, in fact it wasn't what I was shown it would be. This resulted in a class action lawsuit against the company - John Hancock - from which I received a pittance in comparison to what they had "guaranteed" for growth after holding it for 10 years. It's possible the Whole Life Insurance industry has made changes and cleaned up its act, but I would be very skeptical. In my experience, you are far better off buying low cost term insurance and investing your dollars in a Roth IRA to the max possible. Look at every aspect before deciding on this and the cost is higher for fees, etc. I learned the hard way.

March 06 2014 at 2:32 PM Report abuse rate up rate down Reply
2 replies to wclark8622's comment
smithmarc1968

A quick perusal of the Hancock website only shows term, universal, and variable life products. Did they get rid of WL or did you not actually have WL? From your grievance I would have guessed that you had VL, because it's tied to the market and can therefore lose all its cash value. VL was pretty popular back in the 70s, 80s when the market was on the up and up, but has since lost traction for obvious reasons.

As for the class action suit, which one was it in particular? I see a lot of suits about death benefits, but that has nothing to do with your frustration, and a 1997 suit about replacement policies which, again has nothing to do with you.

To your final point, yes, every potential policy owner should do their due diligence and make sure the company and the agent they are working with are in good standing, as well as to make sure what the various fees are that are not related to the actual cost of the insurance. If a company is charging too much in fees, then policy owners should definitely look to compare with other insurance companies.

March 11 2014 at 1:17 PM Report abuse rate up rate down Reply
JJ

There are agents who lie about the guaranteed portion of a whole life policy, therefore the bad rap. A lot of it has to do with the company, its financial standing, and most importantly, the agents' interest at hand. Many prioritize their own commissions, and they will promise you returns that is not actually in your policy. You must be very careful about the agent you choose. But certain policies will guarantee certain growth in cash value... and you must make sure the cash growth will be guaranteed on top of your death benefits. Obviously if you are not sure about it you shouldn't go out and just buy whole life and blindly trust an agent. Insurance is not an investment, it's a transfer of risk. Any agent who sells whole life as an investment for profit is being unethical.

December 03 2014 at 2:04 PM Report abuse rate up rate down Reply
xcourt4hand

Most death benefits are not paid out. And that's because people quit paying the premium. And they quit paying the premium because the death benefit is not needed anymore. If I have two young kids I buy a policy to cover my life should I die. But they grow up and get out of college and I no longer need it. THAT'S why most death benefits aren't paid out. and why term makes more sense for most people.

March 06 2014 at 10:42 AM Report abuse +1 rate up rate down Reply
1 reply to xcourt4hand's comment
smithmarc1968

If you only want insurance to cover you until your kids are out of college then of course you shouldn't buy permanent insurance. If an agent is selling WL and not term to such a person then the agent doesn't know what they're doing or doesn't care about what the client wants.

However, to suggest that everyone buys life insurance with the same goal in mind is ludicrous and rather self-centered. Just because you don't want to have a safe, guaranteed investment, or a benefit to help make sure your debts are taken care of, or a tax free way to pass money to your beneficiaries (etc.) doesn't mean that others don't. Insurance needs to be purchased with a clear goal in mind, and depending on the goal, different products will make the most sense for different people.

March 11 2014 at 1:07 PM Report abuse +1 rate up rate down Reply
inventpeace

Good Article, BUT would like to know exactly how is the principle insured if at all... is it just by the insurance co? or is it by the FDIC? if the former, and if the ins co folds.. do we lose it all?

March 06 2014 at 9:31 AM Report abuse rate up rate down Reply
2 replies to inventpeace's comment
smithmarc1968

If insurance companies fold there are various associations to help cover claims, though usually there will be maximums these guarantee associations will cover up to. It depends on what state you're in and is something you should ask your agent/insurance company.

March 11 2014 at 1:19 PM Report abuse rate up rate down Reply
JJ

You must delve into the financial standings of the insurer. If an insurer goes under, you will be guaranteed only a certain amount by the government, but that certain amount is probably likely to be under the face amount of your policy. That's why with some companies you will have a higher premium, but you can pretty much rest assured that their credit is perfect and they will never go under. A lot of insurers started losing credit when they branched out into investments beyond life insurance, and these are the companies to look out for. If anything, you should buy from a mutual insurance company that ONLY deals with life insurance.

December 03 2014 at 2:12 PM Report abuse rate up rate down Reply