“There are two types of people in the world, those who want to know and those who want to believe.”
I love whole life (WL) insurance as an asset. I think of it as a sort of Swiss Army knife of financial products. WL is a type of life insurance that provides a death benefit while also accumulating cash value. The return on that cash value is made up of two components, a guaranteed portion and a non-guaranteed portion. The non-guaranteed portion of cash value’s return is called a dividend.
The rate of return on cash value has been extraordinarily consistent over decades and has generally avoided the sharp downturns we have seen in the stock market. Put plainly, whole life insurance does a lot of things for me that I like and require.
- Death benefit. If I die my wife and children will receive an income tax free death benefit. It should cover the cost of educating all four of our children and replacing my income for some years.
- Disability Protection. With my WL policy, if I get sick or injured, I qualify for disability waiver of premium. That is, the insurance company will pay my premiums for me, during the period of time that I am disabled. Given that a disability is more likely to occur prior to age 65 than is premature death, this is an extraordinary benefit that does not exist in anything else I know of.
- Long term care (LTC) provisions. According to my policy, if I require long term care, I may access the cash value and a portion of the death benefit. Some sources claim that LTC can cost as much as 100k per year. Depending on where you live, it may cost significantly more. This option, depending on financial circumstances, might obviate the need to liquidate other assets or access other accounts, which might create additional challenges.
- Tax advantages. Currently, the cash value component of whole life insurance accumulates tax advantaged and if withdrawn correctly, can be accessed taxed advantaged during your life. Death benefits are generally income tax free as long as you have set up your policy the right way. Please check with a qualified tax professional.
I have seen a few videos online that, to put it bluntly, bashed whole life insurance as an asset. I was initially confused by them because my own experience, both personal and professional, has been so positive. The individual I could find who argued against purchasing whole life insurance also argues against investing in fixed income in general. He advocates being 100% invested in equity mutual funds, 100% of the time.
Besides being imprudent, in my professional estimation, and exposing those nearing retirement to potentially catastrophic market losses, this mindset dismisses personal preference and risk tolerance.
Further, he makes it clear that he prefers actively managed mutual funds to index funds (low cost funds designed to mimic broad indexes like the S&P 500) on the basis that they will outperform the stock market over time; thus justifying their higher cost.
This is an ambitious belief, given that there is a staggering amount of data showing that, adjusted for their higher cost, actively managed mutual funds have NOT outperformed passive indexes over time. Warren Buffet has spoken frequently about this very topic. Buffet’s partner, Charlie Munger, famously quipped, “Plumbers have value, mutual fund managers do not.”
This financial pundit also implies people can expect 12% average annual returns on their equity mutual funds. Some people have pointed out to him how unlikely his projections are to be realized, based on the data. He dismisses those attempting to inject some sanity into his unrealistic and historically inaccurate assertions as “nerds and egg heads”. I would call them accurate and responsible.
I do not want the people I work with to simply believe things. I want them to believe things based on education and knowledge. I want them to know things and make informed decisions based on that knowledge. I feel strongly that knowledge will never harm us; it will only empower us.
None of this means that whole life insurance, mutual funds or any other asset or investment is necessarily right for you. That can only be determined through a rigorous process of fact finding, education and understanding, overlaid on your personal goals, risk tolerance and preferences, to name only a few factors as there are certainly others.
I believe that we will make better decisions over time by being committed to knowing, rather than simply believing. Endeavor to know more, rather than simply believing what someone said.
If you prefer, work with a financial planner you trust to help expand your knowledge. Then take appropriate action.
*DISCLAIMER: The information contained in this post is based on my experience. Not everyone who applies for a whole life insurance policy will be able to get the same benefits. These policies are subject to an underwriting process which takes into consideration a myriad of factors.
The underwriting process helps determine what benefits might be available to you. Furthermore, it is important to work with competent professionals with subject matter mastery, who can guide you in setting up and utilizing a whole life insurance policy to your best advantage.
Scott R. McGimpsey June 24th, 2019
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC