Need to Know: Whole Life Insurance

Robin Weingast life insurance benefits planningLife insurance has been around for thousands of years. It is believed that the Romans originated the product to fund burials of military personnel who were members of a burial club.

Over time, the reasons for owning life insurance grew more complex, such as to meet estate planning or business planning needs, in addition to personal protection. Product innovations and designs also occurred to meet varying factors, including economic concerns, investment market cycles, medical advances and increases in longevity.

Throughout that time, one proposition has remained constant: None of us know when we’re going to die. Whole life insurance is uniquely positioned to meet that proposition and, thus, has seen a resurgence in popularity because unlike term insurance, it is a permanent life insurance product. And unlike variations of universal life products, it is not subject to interest rate and market fluctuations provided the required premiums are paid.

Once thought of as an expensive form of death protection, whole life insurance lends itself well to various scenarios. Among them:

Scenario 1: Clients who want a higher return with lower risk.

Given current low interests, which are yielding minuscule returns on bank and fixed income financial products, whole life insurance’s cash value growth is now seen as a higher-yielding financial product with similar risk profiles. Yes, it is still life insurance, but the cash value element is often thought of as a bond or CD alternative.

Insurance carriers guarantee an interest rate in cash values. Mutual companies also often provide an annual dividend which is not guaranteed, (although most has paid a dividend every year). The dividend further increases cash values, all of which grows tax-deferred and can potentially be accessed income tax-free through withdrawals to basis and loans thereafter.

Scenario 2: Clients who want a healthy investment portfolio.

Whole life insurance is a non-correlated asset class in a healthy, diversified investment portfolio. For entrepreneurs and more aggressive investors, whole life insurance serves as a counter-balancing force against concentrated positions and aggressive investments.

Scenario 3: Clients who need permanent protection.

The average mortality rate has increased dramatically in recent times due to advances in medical technology, greater access to healthcare, and greater awareness of wellness. As a result, families often realize that there is no standard or finite period to maintain life insurance, such that when the period is over, the “need” or desire somehow goes away.

Other products and designs may not be able to guarantee death benefit coverage through advanced ages without:

• increasing premiums on existing coverage;

• adding to underwriting to get new coverage; and

• reducing coverage on existing policies to maintain the policy and/or premium.

The above shortcomings have led to a renewed awareness of whole life insurance. By design, the death benefit is guaranteed if the premium is paid, thus ensuring the policy will be there when protection is needed. Premiums have been amortized over the expected life of the product so as not to place sticker shock on those who are no longer actively employed but still want and need coverage.

Scenario 4: Clients who have business planning needs.

In business planning situations, advisors and clients have traditionally turned to term insurance to fund buy-sell agreements. Increasingly, however, business owners have discovered that the likelihood of dying while in the business is remote.

It is more likely that the business owner will become sick, injured or leave the business due to retirement or some other life event. As a result, the cash value buildup in a whole life policy is an attractive vehicle to create a sinking fund that will act as a down payment on an installment sale or to supplement a lifetime buyout, while the death benefit ensures funding in the unlikely event of death.

If death does not occur, then the policy can be re-purposed for personal planning use of the departing owner. A well-drafted business continuation plan can address this situation.

Scenario 5: Clients looking for a favorable cost structure.

Overall, costs of a whole life policy are too often misunderstood. As measured by premium outlay, there is no argument that whole life presents the highest premium. However, over a lifetime, whole life insurance generally provides both the highest IRR of premium to death benefit (measured at life expectancy) and also the best cost structure as measured by net present value of premiums relative to cash values.

Scenario 6: Clients who need a “forced” savings vehicle.

As increases in college tuition continue to outpace inflation, and as more individuals and families are realizing they won’t be saving enough in traditional retirement accounts to meet retirement expenses, whole life insurance and its cash value buildup are excellent supplemental sources to accumulate wealth while also protecting the family. The premium payments are often seen as a “forced” savings vehicle.

Thus, there are many reasons why whole life products have enjoyed a resurgence in popularity. For those advisors who don’t typically work with whole life, perhaps a fresh look is warranted. To take a fresh look, contact the Robin S. Weingast & Associates team today. We’re here to help!

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