More and more we’ve been using cash value, whole life insurance as an addition to clients’ investment portfolios. The reason for this isn’t that the age-old industry of life insurance has changed all of a sudden. Rather, it is that the circumstances in the world have changed.
As investors, we currently face historically low interest rates on bonds, a volatile world, and good reason to believe taxes will be higher in the future than now. Whole life insurance has the very attractive qualities of solid long-term growth, safety, and tax free withdrawals using policy loans.
Whole life insurance has the very attractive qualities of solid long-term growth, safety, and tax free withdrawals using policy loans.
There is always a place for life insurance in a person’s holdings when death benefits are needed. The typical reasons for life insurance are: having dependents who would need money in the event of one’s death; and the need for liquidity in settling an estate tax burden. Whole life insurance is often the best way to offset these risks. However, beyond offsetting risks, the other qualities that whole life insurance offers are also very tantalizing – namely security, guaranteed growth, and tax free withdrawals (in the form of policy loans).
Whole life insurance is an underused asset in most people’s planning at this point. Why has it been underused? Most often people are simply unaware of the benefits available to them. In particular, people don’t know how the cash value aspect works, and so think of insurance as an expense rather than an investment. Another possibility is that a slow, safe, long-term investment does not sound as appealing as stocks or other options with more upside potential and a shorter planning view. We think people should understand how cash value works, and see if the long-term thinking of whole life insurance appeals to them.
Cash Value and Death Benefit Life Insurance Primer
Here are a few facts that are of note from an investment perspective about how whole life insurance works:
- The policy has two values, the death benefit and the cash value.
- The cash value increases every year, it doesn’t go down (unless you choose to reduce it).
- Eventually the cash value grows to be more than the amount of premiums paid, leading to the “investment return”.
- Insurance is one of the safest places to put money.The insurance company guarantees the policy values. We use insurance companies that are some of the highest rated companies, of any kind, in the world.
By way of example, a policy set up for cash accumulation (rather than high death benefit) on a healthy 40 year old person can be expected to grow at over 3% internal rate of return over a 15 period. Doesn’t sound super exciting? Consider that this return (which will be higher as time continues) can be accessed tax free, and achieved without a risk of the value going down. If you compare that to bonds it’s like getting over a 4% return (depending on your tax bracket) without the price risk of bonds!
Now, we know that whole life insurance isn’t a magic bullet that solves all problems. However, in today’s investment environment we find much to recommend it. We encourage you to look at whole life insurance with us as an option for inclusion in your overall portfolio. It may be that it doesn’t fit, but it won’t hurt to make an educated decision about whether to include it or not.
Sol is president of MIFI Wealth. He has over 20 years of experience in financial markets and managing businesses.
