More and more people are asking the question, “Is Whole Life Insurance a Good Investment?” What are the pros and cons? As mutual funds and the stock market continue to disappoint investors, there is a gravitation to the safety and guarantees offered by whole life insurance.
I was talking with a client a few weeks ago who had bought a whole life insurance policy from his brother 24 years ago. Just like many people out there, he felt obligated to buy it because his brother was selling it (there’s a good chance you may have experienced this same situation). As the years went on, he continued to do as he was told, invest in stocks and mutual funds.
Fast forward 24 years. As he sat down with me, what he told me was interesting. It took him 24 years to realize that his whole life insurance policy was his best investment. It never lost money, and had outperformed the investments in his 401k (now IRA). He realized that the policy he had reluctantly purchased from his brother turned out to be the smartest financial decision he had made.
So back to the question, is whole life insurance a good investment? For my client, yes. For everyone? Depends…
I can assure you of one thing. A whole life insurance policy will struggle to outperform almost any investment in the first few years of the policy. You will be behind. Why? Because whole life insurance is just that… life insurance. It is not an investment account, and as such, is handled differently. The real benefits of whole life insurance take time, but just like the old proverb good things come to those who wait, whole life insurance needs time to be effective. Here at becomingyourownbank.com we utilize high cash value life insurance to speed up that time as well as the overall growth of the life insurance policy. You can learn more about how we do that here.
Growth of Whole Life Insurance
A study by Mass Mutual (right click to download) illustrates historical policy growth in different scenarios. Actual growth over a 28 year period ranged from 4.49% to 6.52%. When compared to what most people have to show for the last 20+ years, it is safe to say that the growth is very competitive. Its the classic case of the tortoise and the hair.
Even though the growth has been good, there are many more reasons people are using whole life insurance as an investment.
Stock Vs Mutual Life Insurance Companies
Whole Life insurance companies themselves are divided into 2 different types, stock and mutual. A stock company has stockholders, just like most large corporations, and profits are siphoned to these shareholders. As profits come in, shareholders are rewarded. Mutual companies, on the other hand, have no shareholders. Policyowners act as shareholders, and receive company profits in the form of dividends. I like to compare it to making a deposit at the bank, and that deposit giving me credit as a shareholder to receive company profits. A highly unlikely scenario at a bank, but a good example of how a mutual company operates. In looking for a way to maximize the use of whole life insurance as an investment, a stock company does not stand out as the place to go. Mutual companies provide the maximum value to the policy owner, and are an obvious choice to those looking at whole life insurance as an investment.
Whole Life Insurance Guarantees
Another key feature to whole life insurance is guarantees. These guarantees include a contractual, no loss provision, that ensures the cash value of your policy can never be reduced. It also guarantees a minimum growth on cash value every year.
Many life insurance companies have been around for over a century. Because their primary purpose is to pay death claims, they have no need to take risk with the assets they control. Life insurance companies are known for their ultra-conservative investments, and steady growth. I’ve often heard these aged companies referred to as “13-0.” Meaning they have not only survived 12 recessions and 1 great depression, but were able to produce profits all along the way. The companies we like to use have distributed profits, or dividends, for more than 100 years consecutively.
Tax Advantages of Whole Life Insurance
Dividends inside a whole life insurance policy are considered “return of premium.” This allows the policy to grow without taxation. Even though it appears to have the tax structure of a Roth IRA (tax free growth and distribution), there is one important item it doesn’t share. Government intervention. There are no limitations to a whole life insurance policy like a government sponsored plan. No age limitations, no contribution limits, and no penalties. Handled properly, you will never pay taxes on dollars inside your insurance policy.
The other advantage to whole life insurance is the ability to pass on money income tax free. Beneficiaries will receive the full amount of insurance without the loss to taxes. It can be, however, subject to estate taxes if not handled properly.
The Loan Provision
Another appealing feature of whole life insurance is the ability to collateralize cash value. As part of the whole life insurance contract, the insurance companies is obligated to issue you a loan based on cash value. These loans are not subject to credit approval, income verification, or other documentation, and require no repayment structure. In other words, policy loans are flexible to adapt to policy owner circumstances.
How To Accelerate Cash Value
For those that are more interested in cash value growth than death benefit, it is often wise to accelerate the cash value accumulation of a policy through paid up additions and lower death benefit. By decreasing the death benefit, base policy costs are also decreased, leaving more room for premium to be place in paid up additions and ultimately cash value. It creates immediate cash value and quicker growth. I recommend checking out our whole life insurance resource page to learn exactly how we do this.
So for my client the answer to the question “is whole life insurance a good investment?” was yes, but that doesn’t mean its for everyone.