I began my career as a stockbroker, on Wall Street in New York City, in 1995. At that time, I knew nothing about life insurance apart from what I suspect most people think they know. Namely, if you were insured and died, your family received money.
For approximately the last 15 years, I have owned whole life insurance and used it as a financial asset for its tax advantaged savings component and the protection it provides my family against personal calamity.
For some reason, whole life insurance can be polarizing. Most people do not have a strong opinion about it, but a small subset seem to either love it or hate it. I understand the love, but the hate leaves me baffled. Perhaps it is because I do not focus on what things are called but rather, what they do.
When I ask clients or prospective clients, “Do you believe we should diversify your portfolio of investments to create, as much as we can, a stable financial base and protection against the unknown?” most everyone answers something like “Oh yes, absolutely.”
When I ask, “Do you believe that the older and closer to retirement we get, the more we should want our money to be in assets that are less volatile; that is to say, assets less likely to drop substantially in value during an economic downturn or crash?” most respond, “Yes, certainly.”
And when I pose the question, “Would you like to protect yourself and those you love by owning an appropriate amount of life and disability insurance?” the most common reply is, “Yes, of course.”
Yet when I tell people that whole life insurance can help toward all three of these valuable financial objectives and that its track record –with the top companies– of reliability goes back well over 150 years, a small but not insignificant percentage of them respond as if they suddenly became ill.
What is so odd is that suggesting they should diversify by keeping some money in cash and a percentage of their portfolio in historically conservative investments like bonds creates no such response. As I mentioned, folks generally agree, wholeheartedly.
Yet the return on cash has been anemic and bonds can lose significant value when interest rates rise, as they have recently.
Whole life insurance, on the other hand, is what is known as a “non-correlated asset” and does not drop in value with markets or economic cycles. Which, if you think about it, is precisely what we want from the conservative component of our portfolio.
The three most common arguments I hear against whole life insurance are:
- It is slow to build up cash value.
- It is expensive.
- Insurance companies and salespeople make lots of money.
I believe each of these are based on logical flaws. Let us address them in their turn.
It is slow to build up cash value (it is not):
Whole life is neither slow nor fast to build cash value, objectively speaking. Though it might seem slow if compared to the nation’s most popular savings vehicle, the 401K. On what basis anyone would compare the two is another mystery to me, but I digress.
Company 401K plans usually offer a match. Therefore, some percentage of your contribution will be matched, dollar for dollar, by your employer. Our knowledge of math need not rise to Newtonian levels to understand that doubling a contribution will tend to build wealth twice as fast. *
Another factor that makes a 401K (or any tax deferred vehicle) seem to build value faster than other methods of saving is that the money has not yet been taxed. But it will be! The amount seen on a statement can lull folks into believing their financial position is stronger than it is.
I think a sober and bracing view is to mentally deduct half of whatever number you see on your 401K statement balance. So, if you have a million, assume you only have five hundred thousand. Yes, I know that most people’s retirement tax rates are not currently so high, and most do not withdraw retirement money in a lump sum.
However, given that we have over 30 trillion in national debt, and growing, and our government spends around two trillion dollars a year more than it collects in tax revenue, aka the deficit, income taxes might be higher in the future or income tax thresholds might be lower, or both. It is far better to plan for less and have more, than assume more but end up with less.
Conversely, the money in a whole life insurance policy is contributed after tax and can be drawn down in a tax advantaged manner, similar to a Roth IRA. Unlike a Roth IRA, there is no income limit on whole life insurance. No matter how much money you make, if you qualify medically, you are not barred from contributing to whole life insurance and gaining its manifold benefits.
It is expensive (it is not):
Whenever I hear this, I know immediately the person is not knowledgeable on the subject. Their position is rooted in another fallacy of comparison, which is easy to understand.
The thinking is this: Please note these are strictly hypothetical numbers used to illustrate this point and are not a quote or offer. All persons must go through the underwriting process, which includes a medical exam, to be considered for life insurance.
Let us say you can get a term life policy with a one-million-dollar death benefit for $3,500 per year. Let us also say that for a whole life policy with the same death benefit, from the same company, the premium would be $35,000 a year. Therefore, the logic goes, the whole life insurance policy is ten times as expensive.
Term insurance is more like automobile and homeowners’ insurance. If there is no claim, the annual premium is kept by the insurance company. They, in turn, are like our cable television and internet service providers. If we do not watch television or access the internet, they do not discount the bill or give us back our money.
Conversely, the only year in which that $35,000 is mostly buying insurance is the first year. After that, the lion’s share of whole life insurance premiums go toward the policy holder’s cash value. The insurance company then pays dividends to the whole life insurance policy owners, which are added to their cash value.
I note here that dividends, like stock market returns, are not guaranteed and do fluctuate. However, the best insurance companies have a record of paying dividends for well over a century, without missing a single year. Think about that!
I look at this a simple way. Ten years from now, we will either be alive or dead. If dead, whole life insurance will probably produce the best rate of return of any of our assets, vis a vis what we put into it, owing to the death benefit.
If alive, and I certainly hope we all are, we will have a pool of resources that is growing tax advantaged, can be accessed during our life taxed advantaged and is providing lifelong protection for ourselves and those we love.
Perhaps, a good way of thinking about this would be comparing renting an apartment to owning a home. Would anyone expect a five-bedroom home, in a safe suburban neighborhood with excellent schools, to cost the same as a renting a studio apartment beside a train station, in a high crime neighborhood? Of course not, they are not the same thing.
Yet this is similar to the logic applied to comparing term life and whole life premiums. When we are paying term life premiums, we are renting a death benefit which will expire on a date agreed upon in the contract, say after 20 years.
When we are paying whole life premiums, we are buying a death benefit that will remain for our entire life. However, we might also qualify for disability protection and long-term care options. Additionally, we are building savings and receiving a tax advantaged rate of return on those savings.
Depending on a multiplicity of factors, we cannot say that buying or renting real estate is objectively right or wrong. In fact, many people do both. I am one of them. I own my home and rent my office.
In a similar way, buying term life insurance or owning whole life insurance is not right or wrong but depends on the needs, financial objectives, and desires of the individual.
What is not debatable is that renting or owning a home are not the same. Neither are term life insurance and whole life insurance. And no fair and knowledgeable comparison would ever consider them so.
Insurance companies and salespeople make lots of money:
This perception, I believe, is tethered to the previous one. “If whole life insurance costs ten times more than term life, those insurance people must be making a fortune,” goes the thinking.
Of course, you now know that whole life insurance and term life insurance are not the same. And in fact, market research shows that financial representative compensation for life insurance, full service brokerage accounts, and annuities are comparable over time.
There is something important to note here, however. One can manage their own stocks, bonds, mutual/index fund portfolio at “discount” brokerage firms. I do not take a dim view of that choice and I wish those folks good luck.
To my knowledge though, there is no such thing as “discount” whole life insurance. After an individual goes through underwriting, life insurance companies either make offers of insurance or do not. If an offer of insurance is made, the client is free to accept or reject it. The premium for the insurance is the premium for the insurance and I have never known a single instance that it has been negotiated or discounted.
There are people who will read this post and dismiss it out of hand. The more cynical among us might even attribute some pecuniary motivation to my part. They are welcome to. It will not change the fact that every word I have written here is true.
I wrote this article because I believe whole life insurance is the most under-utilized asset in the financial world and that it can help make people’s lives better now and in the future. I work hard every day to help make my client’s and their loved one’s financial lives better.
If you would like to gather and evaluate the data on this, or any other financial tool or strategy, consider speaking with a financial professional who has earned your confidence.
*My default position is to advise people to contribute up to the maximum their employer will match inside their company plan, if they can.
Scott R. McGimpsey May 10th, 2023
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 Cetera Advisor Networks LLC nor Scott McGimpsey is engaged in rendering legal, accounting, or other professional 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.