Whole life insurance is a bad investment because whole life insurance is not an investment at all. Rather, whole life insurance is a insurance policy with a savings account and a death benefit. The following article is intended to put to rest the misleading idea that whole life insurance is a good or bad investment at all.
Whole Life Insurance Explained
There are two types of life insurance. You have term and permanent.
Term life insurance is designed so that the policy remains in force for a set period of time. The term determines how long the life insurance coverage lasts. Term policies are generally 10, 20 or 30 year terms, although other options exist, including annual renewable term. If you die during the term the death benefit is paid to your beneficiary. It is the best life insurance policy if you simply need a death benefit.
Permanent life insurance includes both universal life and whole life. We have other articles on the best universal life insurance, but our discussion will focus on the pros and cons of whole life.
Traditionally, whole life insurance was designed to last until age 100. Nowadays, the policy is set up to age 121. You can choose to pay premiums for life, or choose limited pay whole life insurance where payments are due for a set period of years, such as 7 pay, 10 pay or 20 pay. Once you have paid premiums for the required amount of years, your life insurance is paid-up, and you no longer are required to pay insurance premiums.
Whole life insurance policies can be designed for different objectives. You can design a policy focused on death benefit protection, such as for estate planning or business succession.
Alternatively, and the focus of most of the policies we offer here at I&E, you can design the policy for cash value accumulation. But even when a whole life policy is designed for cash value growth, it is not an investment.
Whole Life Insurance is Not An Investment
Whole life insurance is often compared to investing in the stock market. This comparison is ridiculous. Whole life insurance is not an investment.
Reason #1: Whole Life Insurance is Uncorrelated
Whole life insurance is uncorrelated to the stock market. It is no affected by the performance of the stock market.
An argument you will find is that whole life is un-diversified. However, your policy is with a life insurance company that invests money into different assets, such as bonds, mortgaged back securities, real estate, stocks, derivatives, etc.(1)
So, while whole life is one product, the financial backing is based on the financial strength of the insurance company your policy is with. And that insurance company’s investment portfolio is diversified. Plus, the majority of the mutual insurance companies that offer dividend paying whole life insurance have been around for over 100 years.
If you are seeking diversification, simply borrow against your life insurance policy’s cash value and use the money to invest on your own. For example, real estate wealth building using infinite banking is a great strategy for growing an investment portfolio outside of your whole life policy.
Reason #2: Whole Life Insurance Guaranteed Cash Value Growth
Whole life can be designed for cash value growth or death benefit protection. If your policy is designed for death benefit protection, your cash value growth will be minimal vs a policy deigned for high cash value growth.
If your policy is designed for cash value growth, your policy will achieve much higher growth, historically around 4-6% over the policy’s lifetime.
You see, the way the policy is designed makes all the difference in the world when it comes to performance. A policy set up for death benefit protection will have different mechanics than a policy geared towards cash value growth.
For instance, certain riders will be utilized on the cash value whole life insurance, such as paid-up additions. Through the use of paid-up additions, the insurance company puts more of your premiums to use, rather than towards building up the death benefit.
Reason #3: Stocks, Bonds, Mutual Funds Provide No Guarantees
An investment can be defined as anything that you expect a return on but at the risk of potentially losing your entire principal. If you invest in the stock market, you run the risk of having your portfolio’s value go to zero. Ask anyone who went through the dotcom crash or experienced the housing bubble pop.
Often you will hear financial gurus tell their followers to buy term and invest the difference (BTID). Once again, this is a fabrication created by the financial sector to throw shade on whole life insurance, and improperly characterize it.
Whole life insurance is not an investment in the same way a stock or a piece of real estate is an investment. You can lose money in stocks and real estate, in contrast with whole life insurance, where your returns are guaranteed by the insurance company.
Plus, if you have dividend paying whole life insurance you may earn additional returns through life insurance dividends, which are not guaranteed but are paid annually by the largest mutual insurance companies.
So rather than BTID, buy whole life insurance and invest your cash value — a different way to think than the tired old recommendations offered by Wall Street.
Reason #4: Whole Life Insurance Is Tax Favored
Your mutual funds, stocks bonds, etc. are not tax favored. Any gains you make in the stock market are going to be taxed in that year. This contributes to a diminished principal, and hampers compound interest growth of your money.
In contrast, your whole life insurance policy is tax favored in several different ways. As cash value life insurance, the policy’s cash value growth is tax deferred. You can withdraw cash from your policy up to your basis. However, another option is available.
Through the use of life insurance loans, you can use your cash value as collateral and borrow from your insurance company. The life insurance loan is not taxable. The benefit to this method is that your principal still earns interest in the policy, because your cash value remains. The insurance company still pays you interest and dividends on your principal, allowing true compound interest growth on your money, even when you have an outstanding loan.
Another tax favored benefit of whole life insurance is that your beneficiary does not need to pay income tax on the death benefit proceeds. Life insurance death benefits that your beneficiary receives are not taxed.
Avoiding taxes is a huge benefit of whole life insurance. This is one of the primary reasons whole life insurance is such a great place to store your money. But once again, whole life insurance is not an investment.
Reason #5: Whole Life Insurance As Your Personal Bank
When you stick money in a bank you do not call it an investment. No one would say that they have their money “invested” in a savings account at a bank. Particularly so nowadays when the interest on most bank savings accounts is less than .001%. (FYI, I have an account at Capital One where they currently offer 2% interest rate in a money market account. I still don’t consider that an investment).
So if people do not call the money they have in a savings account an investment, why do we say whole life insurance is an investment? I imagine it is because it is easier for the financial community to bash whole life insurance if we categorize it as an investment.
You see, whole life insurance is a threat to the financial marketplace. It offers many benefits that you do not get in a typical brokerage account or with mutual funds. And whole life insurance is a better place to store your wealth than a 401k.
Rather than think of whole life insurance as an investment, think of it as a savings tool where you keep your principal, waiting for opportunities to arise. Through the use of strategies, such as infinite banking and bank on yourself, you can use your life insurance as your personal bank. You become the banker and you operate in much the same fashion as a banker would. Your money is seen as a valuable commodity, that you loan to yourself (and others) with interest.
Now, rather than always paying interest, you switch roles and begin to receive interest. This is a truly powerful concept and one of the pros of infinite banking. And it is the primary reason to buy whole life insurance.
Those looking to bash whole life insurance will state that it is illiquid and then go on to compare whole life with a CD or some other illiquid financial instrument.
However, whole life is liquid. You can access your cash value in about a weeks time. It is not on lock down for 6 months or more as is the case with a CD. Plus, CD rates are not competitive with the long term returns of a properly designed whole life insurance policy.
Some Additional Benefits of Whole Life Insurance
The following advantages of whole life insurance are often glossed over by its critics, but they are highly valuable and worth mentioning here at the close.
Your cash value does not count against you or your kids student loan application. This is huge because it means you can store money in your whole life policy and it will not jeopardize their chances of qualifying for student aid.
When you begin receiving social security, your social security check can be affected by any income you make. However, your life insurance policy’s cash value can be utilized and it will not affect your social security payout.
In many states the cash value in your life insurance policy is protected from creditors. If you run into some financial problems or face a lawsuit, this protection is critical. Check with the laws of your specific state for more.
Whole life insurance can also include riders that will offer additional protection for you and your financial well being.
Long term care and Chronic Illness Riders are available. If you are diagnosed with a qualifying chronic condition, these riders allow you to receive benefit payments or access to your death benefit to help cover the cost of long-term care.
A waiver of premium rider offer protection if you become permanently disabled and are unable to make your premium payments. If you are disabled, the rider WOP rider kicks in and waives your premium.
Terminal illness and accelerated death benefit riders allow you to access a portion of your death benefit if you are diagnosed terminally ill.
Life insurance dividends add another level of flexibility to your policy. You can use dividends to make premium payments, to take out cash, pay down an existing loan, pay interest on an existing loan, and purchase additional paid-up insurance.
The problem nowadays is…
It can be difficult to find an insurance agent who not only has access to these “types” of life insurance policies, but also understands the individual underwriting guidelines for each.
The good news is…
That because we primarily focus on providing these types of life insurance policies to our clients, not only are we very familiar with them, we’re also quite familiar with a variety of “less complicated” types of life insurance policies as well. Which means that even if it turns out that a whole life insurance policy isn’t going to be the “right” kind of life insurance policy for you, we should have plenty of other options as well.
At the end of the day, we’re not here to “sell” you on any one type of life insurance policy. All we’re here to do is help you decide which type of life insurance might be best and then help direct you towards which insurance company we believe might provide you with the best opportunity for success.
Regardless of what type of life insurance you decide is going to be “right” for you, you’re still going to need to be able to qualify for it. This is why we work so hard to maintain dozens of relationships with many of the top life insurance companies so that when it comes time to helping you find the best life insurance company for you, we won’t have to rely on just one or two options!
So, what are you waiting for? Give us a call today and see what we can do for you.