Why Whole Life?

I read this on a message board yesterday and thought it was interesting:

Whole Life is a product that:

1) Uses a dollar to do two jobs
2) Is safe, secure and grows income tax deferred
3) Accumulates cash for emergencies or opportunities
4) Can provide a retirement income that increases as you get older
5) Is not restricted by your earnings and is accessible before 59 ½ without penalty
6) Provides a leveraged, income tax free benefit to your beneficiary at death
7) Deposits continue to be made into your account in the event of a long term disability

What do you think?

I am savings.

Yes, this post is going to talk about cash value (permanent) life insurance. And no, I am not going to focus on the debate that rages between the "Buy Term and Invest the Difference (BTID)" crowd and the "Cash Value Insurance is the Swiss Army Knife of Financial Products" folks. (It's a ridiculous comparison anyway.) What I am going to focus on is the power that the right life insurance policy can have as a savings vehicle.

So before we start, let's get this out of the way. Some life insurance policies accumulate cash values and some don't.*  Those that do accumulate cash values for the benefit of the policy holder can be split roughly into two types: whole life and universal life. There are several variations of each, but I will limit the discussion her to the generic forms of both. With whole life, you have an insurance policy with level premiums and level death benefits. As time passes, cash accumulates within the policy and the insurance company's net risk is reduced. You are in effect "self-insuring" (although I hate that term because you can't really "self-insure"--the definition of insure infers the transfer of risk away from oneself!). A universal life policy has an adjustable premium and an adjustable death benefit. This mean that you can, if you so choose, opt to raise or lower either the premium or the death benefit, or both, within the parameters of the policy.

Many people make the mistake of equating whole life and universal life. In fact, these are very different animals living in the same zoo. (Did I push that analogy too far?) Whole life offers guarantees on everything--the premium, the accumulation of cash surrender value, the death benefit, etc.  Universal life does not; universal life's flexibility requires that certain parts of the policy be adjustable, including the factors that contribute to premium, cash surrender values and death benefit.  The best way I can explain it is like this:

With whole life, I will pay you $100 per day for your labor, and I will charge you $80 per day for your food. I guarantee this. So each and every day you will know, and can predict into the future, what you will have. With universal life, Here is what I will guarantee: I will pay you between $75 and $125 per day and I will charge you between $60 and $90 per day for food. We can take a guess at where you'll be in the future but we can only know for a certainty within a range of figures where you will likely be at in the future.

All right, I thought that it was important to highlight the difference between the two major types of cash value policies. That's done, so now let's address the point of the post: I am savings.  Yes, yes, yes! Permanent life insurance can function as a savings vehicle--a savings vehicle that compares favorably with other savings vehicles like bank accounts and CDs. In some ways it is better, in other ways it is not. Better because your savings accumulates without taxation, better because your money often earns a greater rate of return. It's also better because your money is doing "double duty", securing your life insurance while at the same time growing. If there is a slight against having your savings in a permanent insurance policy, it has to be liquidity. In the first 10 to 20 years, your funds are not as liquid as they might be in a bank account or CD.

A life insurance policy can be a powerful savings vehicle. There are any number of stories on the internet about how money from a life insurance policy was used to start a great business (Papmered Chef, Disney) or amass a great fortune. Perhaps it is something you one should consider when deciding on a policy.

Next: I am property that increases in value from year to year.

*Actually, this isn't entirely correct; all life insurance policies accumulate cash values. Huh? What is this you say? I've heard that term insurance is "pure insurance" without any "savings account" or "side fund".  Mostly, that's nonsense. What term insurance lacks that most permanent policies offer are cash surrender values. That's right, if you buy a 10,20 or 30 year level term policy, you will be overpaying for your insurance in the early years. This overpayment is essentially a "cash value"--it just isn't a cash value that is available to you, the policyholder. With a whole life policy, for example, you are also overpaying for the insurance in the early years. The difference is that with the whole life policy, the insurance company makes some of this excess cash available to you (in a variety of forms). Also, I know that I am simplifying; I do this fully aware that I am inviting a semantic debate, but what I post is conceptually right.

I help people see visions, dream dreams, and achieve economic immortality.

When I was first learning the life insurance business, one of the instructors of my pre-licensing course mentioned something to the effect of "life insurance creates an immediate estate". I didn't think much of it at the time, but now, after having been in the business for several years, I have a clear understanding of what he meant and it is my hope that I can convey the power of his statement to you.

We tend to think of life insurance as a necessary evil, akin to automobile or fire insurance. To some extent this is a fair comparison. Most of the time we buy life insurance because we know that if something happens to us, our family is going to suffer. In addition to the emotional and psychological turmoil, they will also suffer a real financial loss. After all, if we pass away, we won't be around to bring a paycheck home anymore! And without that big check that the insurance company delivers, our families would struggle financially and would often be forced to make difficult decisions--decisions like moving in with relatives, moving to a smaller house or a less-than-desirable neighborhood, postponing college educations, etc.

So we think of life insurance as a tool to protect our income should the possibility of our death become a reality. This makes sense. But unlike car insurance, where we are truly insuring against a possibility, life insurance insures against a certainty. (Benjamin Franklin is often quotes as saying that "in this world nothing can be said to be certain, except death and taxes.") It is in this certainty that the real power of life insurance can be felt.

The right kind of insurance, properly purchased, creates an economically immortal estate. There is no more efficient method of passing wealth from generation to generation than through the use of life insurance.
Properly structured, life insurance benefits pass completely tax free to the beneficiaries. That's free of income tax, estate tax, property tax or any other kind of tax. That's right, 100% tax free transfer of wealth, regardless of the size of one's estate and regardless of our government's current stance on estate tax rates. So what does this mean? Well, for one thing, it means that a family can use their other economic resources to their full extent (maximum efficiency) because they don't have to worry about preserving their assets to pass on to their children. It means that husbands and wives can maximize their pension benefits, because on their passing, a large death benefit will be created, enabling the surviving spouse to survive, even flourish in his or her remaining years. The existence of a death benefit frees a person from having to conserve his assets, allowing him to fulfill his dreams today without worrying about his family's tomorrows.

Here is something to think about: in my time as a life insurance salesperson, I've never once heard anyone complain that the death benefit that they received was too large.  Why do you suppose that is?

Next: I am savings.

I am a promise to pay.

A promise to pay. This is what it all boils down to. Because in the end, the fulfillment of this promise is what you are counting on to provide for your family. So it makes sense to choose your insurance company wisely. I suggest that you start by selecting from only "highly-rated" insurance companies. For me, this means companies that are rated "A-" or better (Excellent or Superior) by A.M. Best. These are the companies with the strongest claims paying ability. These will be the companies that will be there to write the check to your loved ones if the lose you prematurely.

Some of the companies that are currently rated "A-" or better are:

• Assurity Life Insurance Company (A-)
• Fidelity Life Association (A-)
• Genworth Life Insurance Company (A)
• RBC Insurance (A)
• ReliaStar Life Insurance Company/ING (A)
• West Coast Life (A+)

Of course, there are many others and any good life insurance agent will be happy to share insurance company ratings with you.


Next: I help people see visions...

I am a piece of paper, a drop of ink and a few pennies of premium.

This is how it all starts. You want to protect your family. You know that the best way to provide for them in the event of your death would be an immediate cash payment. And the larger the better. So you make the smart decision and contract with an insurance company to exchange a few pennies of premium each month for a piece of paper with some ink on it. But it's the words written with that ink that are so powerful, because contained in those words is the promise that the life insurance company is making with you--the promise to provide an immediate cash payment to your grieving family, right at the time that they need it the most.

Next: The promise...

I Am A Life Insurance Policy

Here is a perfect description of what a life insurance policy is and what it does.

I am a piece of paper, a drop of ink and a few pennies of premium.
I am a promise to pay.
I help people see visions, dream dreams, and achieve economic immortality.
I am savings.
I am property that increases in value from year to year.
I lend money when you need it most, with no questions asked.
I pay off mortgages, so that the family can remain together in their own home.
I assure people the daring to live and moral right to die.
I create money where none existed before.
I am the great emancipator from want.
I guarantee the continuity of business.
I conserve the employer's investment.
I am tangible evidence that a man is a good husband and father, and a woman a good wife and mother.
I am a declaration of financial independence and economic freedom.
I am the difference between an old man or woman and an elderly gentleman or lady.
I provide cash if illness, injury, old age, or death cuts off the breadwinner's income.
I am the only thing that you can buy on the installment plan that your family doesn't have to finish paying for.
I am protected by laws that prevent creditors from assessing the money I give to your loved ones.
I bring dignity, peace of mind and security to your family.
I supply investment capital that makes the wheels turn and motors hum.
I guarantee the financial ability to have happy holidays and the laughter of children – even though father or mother is not there.
I am the guardian angel of the home.
I am life insurance.

The original author is unknown, but I found the text here: Financial Services Journal