About Whole Life Insurance [Re-Defining an Antiquated Product]

We are all influenced by the daily messages that we receive and yet the messages may be incomplete or wholly inaccurate.  This pattern can lead to misconceptions about many things.

For this reason, it is all too common to let misconceptions cloud any meaningful discussion of whole life insurance pros and cons. When we’re talking about whole life insurance, it requires some re-thinking about how you view this powerful tool.

I suggest that your estate and wealth building plan may miss out on some major potential benefits if you do not clear up these misconceptions by unlearning everything you think you know about whole life insurance and specifically “participating whole life insurance from a mutual company“. 

Now before we attempt to change your worldview on whole life insurance let’s begin with some basic whole life 101.

Defining Whole Life Insurance

Whole Life Insurance Definition: also known as ordinary life insurance, it is a type of permanent life insurance policy that offers a guaranteed death benefit, guaranteed fixed premium, guaranteed cash value and guaranteed access to the policy’s cash value through loans and withdrawals. Certain policies, known as participating whole life, also receive an annual dividend. Whole life enjoys some excellent tax advantages, including income tax free death benefit and tax free policy loans, as well as tax deferred whole life cash value growth.

Participating vs Non-participating

Within the world of whole life insurance are participating whole life policies and non-participating policies. 

Non-participating simply means the policy does not receive dividends.

Participating whole life insurance pays dividends to the eligible policyholder. The policyholder shares in the carrier’s earnings. Dividends can be used to buy more paid up insurance, earn interest with the insurer, pay policy premiums, or received as a cash payout.

Ordinary Level Premium Whole Life vs Limited Pay Whole Life

Ordinary level premium whole life insurance has level premium payments for the duration of the policy, typically until age 100. Upon reaching the target age, the whole life cash value equals the target face amount of the policy. No premiums are required upon reaching the target age.

Limited pay whole life insurance has specific target dates in terms of years or to age 65. For example, 10 Pay whole life requires 10 years of premium payments and 20 pay whole life requires premium payments for 20 years. Upon the end of the 10 or 20 year period no premiums are required. However, the death benefit and cash value can continue to grow with participating policies since the dividend can be applied to purchase additional paid-up life insurance coverage.

Now with that basic introduction to whole life insurance aside, we now present you with our article on…

About Whole Life Insurance

[Why everything you think you know is wrong]

Try this simple exercise

To demonstrate how fickle our perceptions are, try this simple exercise.  Cross your fingers and tap the tip of your nose.  Your perception, as interpreted by your brain, will determine that you have two noses.  The more that you tap, the more your brain will register two noses.  For purposes of this article, allow me to suggest that the conventional wisdom about dividend paying mutual whole life insurance believes that there are essentially two noses if you understand the point…this is a matter of flawed perception.

Whole Life Insurance is a Terrible Investment

Allow me to suggest that your perception may be that whole life insurance is a terrible investment?

How about the often repeated but substantiated claim that you should “buy term and invest the difference”?

Perhaps you’ve been given the “message” that you will get a better return on your investment (ROI) by putting your money somewhere else?

All of these are perceptions about life insurance that have “poisoned the well”, if you will, against what in reality is a highly strategic and dynamic estate and wealth planning vehicle.

And people typically have no idea about the cost of whole life insurance, nor the benefits of life insurance in general.

If you’re still tapping your nose, go ahead and stop for now.

Bank Owned Life Insurance (BOLI)

I ask you to consider why the top players in the “money business”, you know those with access to the top financial experts in the U.S., own literally “billions” of dollars of dividend paying, mutual whole life insurance?  There is even a same for it…BOLI (bank owned life insurance) or COLI (corporation owned life insurance).  If you’re answering something like, they can afford to put their money is slow growth assets, you’re still tapping your nose and I need you to WAKE UP!

Okay, let’s go through this together…

In early 2000, a guy named Nelson Nash coined the term “Infinite Banking Concept” (IBC), to describe what he’d discovered was a way to strategically use dividend paying, mutual whole life insurance to essentially create your own private, family banking system.  Mr. Nash wrote a book about it called, you guessed it, Becoming Your Own Banker, and I highly recommend it.  A few others have followed in Mr. Nash’s footsteps…but not many.

Becoming Your Own Banker

It sounds cool, right?  Creating your own bank would be great but…you might be asking why you need this or whether it would apply if you have a smaller estate?   This is where things can start to get really exciting.  However, we need to provide some context so let’s start with a bit of time traveling…

Back in the late 1800s, when America was a young country taking great strides and many of her greatest minds were making unprecedented discoveries…i.e. Franklin, Edison and Graham.  During this time, one of the first financial tools of the western world was created and its origins dated back to ancient Rome.  This tool would become so ingrained in American culture that making changes to it would become nearly impossible.  This asset would save countless families from financial ruin and would become the last place truly protected from greedy investors, untamed government and financial collapse.

Further, this financial fortress would empower some of the greatest entrepreneurs in history such as Ray Kroc and Walt Disney, both of whom borrowed against their whole life policies to finance their historic ventures.  During the Great Depression, the stock market would suffer an astonishing 32 year setback and lose 90% of its value from its peak in September 1929.   During this time, while banks, businesses and government sectors were closing their doors, one sector of the economy stood unaffected.  You guessed it, mutual life insurance companies.  In fact, whole life insurance is so stable that many were paid dividends from profits every single year during the Great Depression.

So ask yourself…

Why aren’t folks being urged by the financial community to park more of their money into this type of cash value life insurance?

And if utilizing dividend paying whole life insurance coverage from a mutual company is so beneficial, why is everyone not raving about it?

Two Primary Reasons

First, there are very few life insurance professionals that understand how to utilize dividend paying whole life insurance to establish an effective self banking strategy. This idea, originated by Nelson Nash, cited above, has evolved over time into a powerful wealth building personal banking strategy.

In a nutshell, while most whole life insurance is fixated on maximizing the death benefit of a policy and just allowing cash values to grow over time, strategic self banking focuses on maximizing life insurance cash values, so the whole life insurance plan can be used strategically as a savings and personal financing vehicle for the purpose of recapturing your cost of capital incurred when having to deal with third party lenders or using your own cash.

Yes, you read that right…

When you spend your own money, do you pay yourself interest on it?  If you’re like the majority of Americans, I’ll guess your answer is no.  In fact, I’ll guess that you’re either paying credit card companies somewhere between 10% and 27% to use their capital, or, if you’re abnormally frugal in today’s environment, you’re saving and paying cash for your purchases.

Consider the fact that, whether you’re borrowing money at exorbitant interest rates or paying cash, you’re still losing money because when you spend your own cash without paying yourself interest, you’re losing the opportunity cost of that capital invested elsewhere.

Economic Value Added (EVA)

American corporations stock increased when they discovered this exact concept years ago as per the theory of “economic value added” or EVA.  When this idea “clicks” for you, the benefits of strategic self banking become self evident.  In a climate with notoriously low interest rates, where can a person put his/her money that will be safe and will allow a contractually guaranteed rate of return?   If you’re guessing a properly designed dividend paying mutual whole life insurance policy, you would be correct.

You see, when a participating whole life insurance plan is properly structured to maximize the cash value, the cash value can become available relatively quickly depending upon the amounts deposited and the other details of the policy.

Loans from life insurance can be taken using the cash value as collateral (without penalty) to pay for items that are already monthly expenditures such as vehicles or real estate loans.

Part of the strategy is to work with mutual life insurance companies that allow flexibility in borrowing from the policy and allow the cash value to accrue regardless of outstanding policy loans.

Under current tax laws, dividends paid from these policies are tax free because they are viewed as a return of premiums paid.  See 26 US Code section 803.

Cash accrual in the policy is also tax free under IRC 7702, provided the policy is never surrendered and the death benefit is also not subject to income taxation.

One way to think about this strategy is like a Roth IRA without the IRS restrictions.

There are a few key guidelines for any self banking strategy that are critical to your success:

• As in starting any other business, the cash value may not equal initial deposits for some time, however this will catch up as the policy is funded, with the help of paid-up additions.
• This insurance policy needs to be treated like any other loan, or business asset, and thus it is critical to pay back the policy loans or at least the interest.
• It is highly beneficial to continue paying life insurance premiums even if the insurance policy no longer requires it or it may be paid from the cash value.

Primary Reason #2

Second, as mentioned earlier, there are a few common objections to whole life insurance in general that essentially “poison the well” and yet are easily debunked as follows.

1.  The rate of return (ROI) on a life insurance financial plan isn’t very good and thus this is a “bad Investment” and thus it is better to “buy term and invest the difference”.
2.  Whole life insurance is only beneficial for the wealthy.
3.  Upon the insured’s death, the life insurance company “takes your cash value”.

These 3 objections all relate to one another so I’ll debunk them together in the context of a solid infinite banking strategy.

The idea of putting your money into an investment with a higher rate of return sounds reasonable, and yet this objection is based upon a flawed assumption and is irrelevant in large part.

First, the flawed assumption is that one can get a higher return in a safer investment and this is hard to justify in today’s low interest rate climate.  Because we are in an extremely low interest rate climate, a “higher return” will likely require an investment of greater risk.  Although the financial talking heads may not agree, you should have a solid, safe “savings bucket” arguably prior to your investment bucket which should be what you can afford to lose.

Also, the common puffery of mutual funds and similar investment fails to account for the fees which are extremely difficult to determine…even for the savvy investor.  IRAs and 401k fees and returns are just as speculative and, at the time of this writing, the future for these retirement vehicles for the next ten years, at least, is in serious doubt, go to full bloomberg article.

Further, this objection is largely irrelevant because utilizing the self banking strategy will not prevent you from pursuing investments that offer a higher ROI.  On the contrary, this approach will allow you a reserve to draw from in order to pursue such investments.  In fact, taking a policy loan and paying it back to your policy will likely multiply the ROI achieved from the other investment, assuming this was a viable opportunity, because you will also be borrowing from yourself and maximizing your policy return.

Second, if a strategy is deemed universally beneficial to the wealthy, perhaps it is advisable for a less wealthy person to consider it as a way to build wealth.  Doesn’t it make perfect sense for less wealthy folks to adopt a strategy that has been proven protect and grow the wealth of the wealthiest individuals and corporations?  This objection is really about who one should model concerning finances…a broke brother or a rich uncle?

Generally, savvy wealthy folks are not interested in losing money and that is the power of whole life insurance and particularly dividend paying mutual whole life insurance.  Of course, wealthy people, banks and corporations, benefit from reallocating large sums of capital to these policies and then borrowing against them.  However, ask yourself who can better afford to lose money…less wealthy or more wealthy folks?

Are these policies adaptable to a non-wealthy budget?  

The reality is that these policies are so flexible that a person could place $100 per month into one and the same strategy to grow the cash value can be applied to a less wealthy person as to one with greater wealth.  These policies are contractually guaranteed to provide a return (often 4-5% in today’s financial climate) and also most have paid dividends steadily for the last 100 years.

I’ve often dealt with this same objection in the world of estate planning documents and the response here is the same…less wealthy folks are arguably more impacted by poor planning (legally or financially) than are the wealthiest individuals.  This objection is closely related to the other flawed assumption that “it takes money to make money”.

We live in a world that desires instant results, so it is understandable that public opinion doesn’t get too revved up about an asset that takes some time to mature.  Yet, this is precisely what happens with dividend paying mutual whole life insurance.  Give this asset some time and its value will exponentially increase…this philosophy goes hand in hand with the idea that anything worth pursuing requires time and patience to flourish.

Third, the suggestion that the life insurance company “takes the cash value” upon the policy holder’s death is based upon a misunderstanding of how the policies work. To illustrate, understand that very few “term life policies” ever pay a death benefit because the insurance company has determined that the policy will likely expire before the death benefit is ever paid…and most do.  This is why term life policies are very cheap for younger folks and become more expensive as we get older.

On the other hand, whole life policies do not expire if the premiums are paid and thus the death benefit will be paid eventually provided the policy remains in force. If the policy is ever surrendered, the cash value is payable to the policy owner.

The way to understand this is that the cash value of the whole life policy is like the equity in your house and the death benefit of the policy IS the house. The key is that when you maximize the cash value in a strategic self banking strategy, you also maximize the death benefit of the policy…they tend to mirror one another in growth and your estate will be benefiting from either the cash value or the death benefit.

Not only will the policy pay a lump sum death benefit to your beneficiary, but the death benefit can also be accessed early due to terminal illness. Some policies even allow access to the death benefit for chronic illness, with long-term care riders also available.

You can even protect yourself in disability through the use of a waiver of premium rider, which will kick in if you are permanently disabled. The company will essentially waiver your life insurance premiums.

Of course, all of the above entails a sophisticated strategy involving the right approach and utilizing a policy from a preferred dividend paying mutual whole life insurance company.  Of course, this is our mission at Insurance and Estate Strategies.  When you’re ready and even if you’re not quite convinced, contact us for your complimentary strategy session.   I’m confident that it will be a defining moment for you and your loved ones.