Is Whole Life Insurance a Good Investment?

More and more people are asking the question, “Is Whole Life Insurance a Good Investment?” As mutual funds and the stock market continue to disappoint investors, there is a gravitation to the safety and guarantees offered by life insurance.

I was talking with a client a few weeks ago who had bought a life insurance policy from his brother 24 years ago. Just like many people out there, he felt he was obligated to buy 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. He told me it took him 24 years to realize that his 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 life insurance policy will struggle to outperform almost any investment in the first few years of the policy. You will be behind. Why? Because life insurance is just that… life insurance. It is not an investment account, and as such, is handled differently. The real benefits of life insurance take time, but just like the old proverb good things come to those who wait, life insurance needs time to be effective.

In the early years of my clients policy he saw little to no benefits. I’m sure he struggled with the idea of getting rid of it, but knew he would feel guilty. Fast forward 24 years, and it was the best decision that he had made financially.

Growth

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 life insurance as an investment.

Stock Vs Mutual Companies

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 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 life insurance as an investment.

Guarantees

Another key feature to life insurance are 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.

Safety

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

Dividends inside a 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 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 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.

Loan Provision

Another appealing feature of whole life insurance is the ability to collateralize cash value. As part of the 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.

Accelerated 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. This is where the expertise of the agent comes to play. Few agents understand how to properly set up an insurance policy to accelerate its investment growth. I recommend downloading our took kit to learn how to do this properly.

So for my client the answer to the question is life insurance a good investment was yes, but that doesn’t mean its for everyone. It takes time. Please feel free to leave us a comment or contact us if we can be of any help.

Jake

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