Part of the nobility in purchasing whole life insurance is taking
care of those you love the most by providing them with a death benefit
or lump sum payout upon death. Even though purchasing a permanent death
benefit is an important part of life insurance, this is not the only
benefit when it comes to certain types of permanent life insurance
policies.
Certain products such as
term life insurance OR
guaranteed universal life ARE primarily about securing a death benefit.
This article will zero in on the five of the most exciting
benefits of whole life insurance that ARE available to the policy owner,
in life, and NOT the beneficiaries upon death.
Before diving in to this discussion, let’s set the stage.
When we’re talking about whole life insurance in this article, we are
specifically referring to “dividend paying whole life insurance”,
verses other types of permanent life insurance such as indexed universal
life or variable universal life insurance.
Not that there is anything wrong with
universal life insurance. Some of the benefits to be discussed may actually overlap with these other types of permanent life.
However, the following benefits utilize a whole life policy as a safe
bucket investment. For now, let’s consider this policy a sort of “home
base” for your safe capital that can be easily accessed for other higher
risk endeavor such as equities or real estate investment. With that in
mind, let’s dive in.
The Best Whole Life Insurance acts as a Safe Bucket Asset
Most people that become interested in permanent life insurance for
any reason, other than securing a permanent death benefit, are motivated
by accruing cash value within the policy. For those who gravitate
toward the
traditional whole life genre of permanent life, they are typically interested in the safety and stability offered.
I can hear the critics shrieking now, insisting that universal life
policies are just as safe. This point is hotly debated, and I’ll touch
on the pros and cons of each now in the context of providing a safe
bucket.
The Need for a Safe Bucket
The idea of a safe bucket using whole life insurance as an asset is
not new and is certainly not exclusive to permanent life insurance. On
the contrary, this concept is one of the essential aspects of wise money
management and well known in the investment world.
Simply put, most people are invested either in the financial markets
or real estate, and these arenas carry a certain amount of inherent risk
due to economic cycles. The logic goes…in a bad year if the market
drops 10%, due to the reduction of basis in the account, it will take
longer to make up for that 10% loss than did to lose it. Even if the
market gains 10% the following day, the full 10% will not be recovered.
This is a math question and we have some more ground to cover, so I’ll
leave it there.
Whole Life vs. Universal Life as a Safe Bucket
The following sections will touch on the advantages of whole life insurance, and they are all attributes of
why whole life is the best safe bucket investment.
The short version, however, is that whole life is not basing the cash
accumulation on the performance of any of the financial markets. In
today’s market, for example, it is possible to get a guaranteed 3.5-4%
return plus dividends of 2-2.5% and other non-guaranteed accrual that
can be historically documented regardless of economic conditions.
Indexed universal life, on the other hand, bases the
cash accumulation on any number of market indexes such as the S&P
500. To offset the obvious risk of loss,
indexed universal life policies generally offer a floor of 0 – 1% and cap the gain somewhere around 10-13%.
Variable universal life, just to mention, does not
attempt to mitigate market risk and in this way is identical to
investing in the markets, plus a death benefit.
Over 170 years of history reveals that whole life insurance has
weathered every economic cycle and has offered a consistent return to
policy holders through the darkest of times.
The fact that whole life is a fixed premium plan as opposed to
universal life’s flexible premium structure, also adds to the inherent
stability of whole life because the policy does not have to be actively managed in order to assure that it doesn’t lapse.
Here again, some universal policies have opted to offer a “no lapse
guarantee” to mitigate this inherent risk. However, no lapse protection
only pertains to the death benefit on not the cash value which is
typically raided to pay premiums that go unpaid for “flexibility”
reasons.
Not that universal life doesn’t have its benefits and uses. Its
inherent flexibility and potential for high market returns may be an
ideal scenario for some.
Now that we’ve addressed the distinctions between whole life vs
universal life, let’s dive into the other benefits of whole life
insurance.
Whole Life Insurance with Guaranteed Cash Accumulation
In discussing the difference between whole life vs universal life
policies, we touched on the fact that traditional whole life insurance
offers guaranteed cash accumulation. This is a simple fact with no fine
print. In the world of whole life insurance, guaranteed means
guaranteed.
Additionally, every whole life policy has both a guaranteed and
non-guaranteed projected return in its illustrations. The guaranteed is
set to occur regardless of economic conditions or company performance,
and the non-guaranteed portion is based upon dividends and other factors
related to the performance of the company.
So, in our example above, the 3.5% would be guaranteed and the
non-guaranteed projected growth would likely be another 2.5 -3%. Another
factor that can make these returns attractive and dependable is the
history of most well-known mutual whole life insurance companies.
Many
top dividend-paying whole life companies can offer an impressive history of dividend payments for close to 200 years.
Whole Life Insurance and Tax Advantages
Speaking of
whole life insurance dividends,
whole life insurance offers considerable tax advantages.
Simply put dividends that are paid to policy holders are not counted by the I.R.S. as taxable income.
Why are non-taxable dividends allowed?
The answer goes back to what we talked about in our first paragraph
in referring to mutual participating whole life insurance. Mutual
companies, as opposed to stock companies, are technically owned by the
policy holders. These companies offer “participating policies”, which
means that that the policy owners are participating in the profits and
losses of the company.
Dividends are paid when the amount of premiums paid by all the policy
holders exceeds the overall expenses of the company. For this reason,
the I.R.S. considers dividends as a return of premiums to the policy
holders and NOT taxable income.
Generally, the policy owner gets to choose what to do with the
dividends. The tax favorable aspect of dividends in a sense can
supercharge the cash value accumulation inside of a whole life policy if
the policy owner elects to have the dividends reinvested into the
policy.
In addition to dividends, proceeds that accumulate within any
permanent life insurance policy
are NOT taxed as long as they are left in the policy and not withdrawn
or surrendered. Even if withdrawn, the accumulated cash is NOT taxable
until it exceeds the total amount of premiums paid into the policy.
Whole Life Insurance and Legal Asset Protection
Depending upon your state of residence, the laws may afford protection for your life insurance contract.
This is the
asset protection aspect of permanent
life insurance that many people aren’t aware of and yet is a powerful
fact to consider. In a culture of raging lawsuits, your brokerage
account, mutual fund, CDs and bank accounts stand unprotected from
judgment creditors. This type of risk and various asset protection
strategies are explored in some death in the
Estate Planner’s Tactical Guide, which can be downloaded for free on our website.
In a nutshell, in the fallout from a civil lawsuit, liens can be
attached fairly easily to all unprotected assets. The cash value in your
permanent life insurance policies are typically treated under state
laws as protected assets, and in the best states, the cash value may be
fully protected from lawsuits. This is another characteristic of whole
life insurance that makes it the ideal safe bucket investment as
discussed above.
Whole Life Insurance Provides Ready Cash for Other Investments
When we talk about
whole life insurance as an asset, it is easy to draw an
analogy between real estate and whole life insurance for a few reasons.
First, real estate builds equity in the same way that whole life
insurance accrues cash value. However, with whole life, a portion of the
accrual is guaranteed…not so with real estate.
Another aspect is that real estate is often used as collateral to
secure loans with third party lenders. In the same way, the cash value
in your life insurance policy can be used to secure loans, but with a
few additional benefits that surpass real estate.
Benefits of Whole Life Policy Loans
Simplicity
Most people know that taking an equity loan against your home or
investment property requires jumping through quite a few hoops with your
chosen lender. There is an application, followed by a hard inquiry on
your credit, followed by a lengthy approval process that can take weeks
to months. Not so, with
whole life insurance policy loans.
Most life insurance companies offer the policy loans directly upon a
simple request, and proceeds can often be received in a matter of
hours. There is no application process for policy loans, not impact on
your credit and you cannot be denied. Of course, I should also mention
that loans do NOT constitute income.
If this benefit isn’t yet clicking, I suggest you slap yourself now
or douse yourself with cold water. Think about the fact that people
build wealth in real estate by acquiring assets and leverage those
assets to purchase other cash flow assets.
This is also a major benefit of whole life insurance, and arguably
the scenario is superior to real estate. Don’t take my word for it,
google how Ray Kroc, of McDonalds or Walt Disney jump started their
financial empire.
Low Interest Rates
Another favorable aspect of whole life policy loans is low interest
rates. Admittedly, we are in a low interest rate climate, so policy
loans can be obtained at rates of 4-6%. However, those in the know
predict that if interest rates were to rise, dividend rates would soon
follow and this is important when considering the impact of outstanding
loans on policy performance.
Non-Direct Recognition
One of the key aspects of using life insurance loans as collateral
and related strategies, is to be able to take out policy loans with no
impact on policy performance. This is an important aspect of what is
called
non-direct recognition whole life companies.
Non-direct recognition, simplified, means that the policy dividend
rates are not “adjusted” due to outstanding policy loans. This would
allow the cash value to continue to accumulate unaffected by the
outstanding loans.
This aspect of policy loans could easily occupy an entire article and
is oversimplified here. For example, some direct recognition companies
show a solid history of performance regardless of policy loans and still
may be strong contenders with the non-direct recognition companies.
Financial Arbitrage
At the core of the direct and non-direct recognition question is the ability to create a
financial arbitrage
with the cash value. For example, if you borrow $10,000, secured by
your policy, at a rate of 6% and loan it out as a hard money loan at
10%, you just created an arbitrage.
Similarly, if you invested your $10, 000 in real estate or another
higher risk opportunity, perhaps your arbitrage increased. But it is
better than that if you consider that your original cash value has not
stopped working and is still accruing inside your policy. So, even if
you are breaking even, your capital loaned to the third party or
reinvested is not costing you anything and is actually still working for
you.
Velocity of Money
Keeping money moving is at the core of a financial philosophy called the
velocity of money, a concept that is nicely described by
George Antone in his book, the Banker’s Code.
In the example of a financial arbitrage above, the policy owner’s money
is working in a number of ways and never stops moving. The life
insurance cash value is still working, and the money has been reinvested
in a second venture offering higher potential returns. Dividends
continue to be paid and tax-free accrual within the policy continues.
Conduit Wealth Building
All of the above are the components of what we call a
conduit wealth building strategy
which on a grander scale involves creating multiple assets of safe
buckets that may then be safely leveraged to pursue other investments
such as real estate, equities or other entrepreneurial ventures.
Best Whole Life Insurance Companies
So which whole life insurance companies are the best at conduit
wealth building? It depends. We’ll list the top companies being used,
but it really does depend on your situation.
Keep in mind even if you do purchase whole life insurance from one of
the companies we mention, the most important part for conduit wealth
building is to structure it correctly where you’re contributing the most
amount of money to the cash value as you’re allowed to while preserving
the tax benefits. This is so important and many agents won’t structure
it that way because they’ll receive a bigger commission.
To keep agents honest, you can compare illustrations your agent sends
you. It’s ok to share illustrations with other agents to make sure
you’re getting the best designed policy for maximum performance – just
make sure the agents are comparing apples to apples.
Now I’ll make it simple and break down the best whole life insurance companies into (1) whole and (2) indexed universal life.
For whole life insurance, make sure you look at Foresters and Assurity
before purchasing from another company. You’ll likely learn of these
cash-value life insurance policies from a captive agent from Mass
Mutual, New York Life or Northwestern Mutual…but make sure you compare
their illustrations to these 2 companies first.
For indexed universal life insurance, make sure you look at North American and Prudential.
There are a lot of indexed universal life insurance policies hitting
the market and right now, these 2 have the best products when you factor
in performance, upside, guarantees and strong financial ratings.
Products get updated monthly and we’ll do our best to keep this
article current. If any of the companies mentioned above get overtaken
by another company, we’ll update it here. In other words, feel
confident in the companies we’re recommending and definitely get rates
from those carriers – even if you have an illustration from another
agent.
Bottom Line
Whole life insurance (and indexed universal life insurance) are great ways to accumulate wealth on a very tax favorable basis.
To learn more about the
benefits of whole life insurance to you as a potential policy owner OR to discuss any of the above concepts in more detail.
You
likely heard of Primerica through a family or friend. Primerica (or
“Prime America” as some people erroneously call it) agents are trained
to target their friends and family to help them with their financial
planning, when in reality this is all in an effort to sell Primerica
Term Life Insurance.