Whole life insurance, also known as traditional permanent life insurance, is one of the most common and oldest forms of life insurance. A whole life insurance policy covers one’s entire life with the options to pay premiums for only couple years, 7 years, 10 years, 15 years or right up to your retirement, thereby providing guaranteed financial protection to your loved ones as well as accruing cash value and paying dividends. In other words, it is a savings vehicle that provides tax-efficient growth of cash value inside the whole life insurance policy and guaranteed tax-free death benefits to your family when you are gone. That is being said there are pros and cons of whole life insurance.
Whole life policy is probably highly misunderstood and one of the most debatable types of life insurance. Yes, word “insurance” is primarily associated with expenses and you are not wired to look at whole life insurance differently. A whole life policy does not contain any stock market element, so in reality the investment lobby is not getting their share of an asset (investment) management fee. So, obviously they do not like when people put their money in to whole life instead of any other stock market related products; and by the way, who controls the financial media? You guessed it correctly – Investment and financial people. For example CNBC, Bloomberg, Fox Business, Wall Street Journal, CNN Money, about.com, Google & Yahoo finance and motley’s fool all controlled by investment people. How many life insurance TV networks and financial mediums can you name?
Whole life insurance is one of the biggest tax-efficient financial vehicles out there. It’s hidden tax planning tool under IRS Sec 7702 that most wealthy people, banks and corporations have understood so well and have used in abundance. Recent industry surveys show that 75% of the Fortune 1000 companies have Corporate Owned Life Insurance (COLI) plans in place and almost 3800 banks own more than $189 billion in bank owned life insurance (BOLI) policies. For example, Bank of American owns $22 billion, JP Morgan Chase owns $11 billion and Wells Fargo owns 18 billion in BOLI assets as per their 2018 first quarter balance sheet. One of the biggest benefits is that BOLI policies produce far superior returns than traditional bank investments, such as municipal bonds, 5- and 10-year Treasuries, and mortgage-backed securities.
Every financial product has its pluses and minuses, let’s discover the pros and cons of whole life insurance now.
Advantages or Pros of Whole Life Insurance
- It provides death benefit for one’s entire life unlike term insurance, according the Penn State University study the death claim rate of term life insurance is only 1%.
- It provides a tax-deferred growth of policy and tax-free withdrawal of cash value via policy loans under IRS Sec 7702, providing you similar tax advantages of Roth IRA/401(k) or 529 College Savings Plans but without their limitations.
- Whole life insurance provides around 4 to 5% IRR – Internal Rate of Return over the long-term period. Most people do not understand IRR – meaning it is a NET RETURN – net to all of the costs and charges. When we talk about stock market return, we are talking about GROSS RETURN – return before all costs, expenses and taxes. According to MeasuringWorth.com, is a nonprofit organization and represent some of the finest universities in the United States and Great Britain such as Harvard, Stanford, New York, Vanderbilt, Oxford and Northwestern, the actual growth rate of Dow Jones Industrial Average (DJIA) since inception in 1885 through 2018 is 5.16%. Whole life insurance doesn’t involve the risk of stock market volatility as it is a traditional guaranteed product. Can you compare stock market with whole life insurance now?
- Cash value inside of a whole life insurance policy is creditor proof in most states. If you are ever get sued or have to file bankruptcy, the cash value inside your whole life policy is (it can be in millions and millions of dollars) safe. How many investment vehicles can you name that can offer this benefit?
- Whole life insurance’s cash value will NOT count as your assets for the financial aid calculation purposes when you apply for your child/children’s college admission. This is a huge benefit. How about your bank account, 529 college savings plans, stock portfolio and mutual funds? Those are all counted against you when applying for financial aid.
- Whole life insurance cash value withdrawal and death benefits are income and estate tax free if the policy is structured and withdrawal done in the in the right manner. Can you claim the same thing about your other investments such as brokerage accounts, CDs, stocks, bonds, mutual funds or even 401K and IRAs?
- If you add a “waiver of premium” rider to your whole life insurance and if you become totally disabled during your premium paying period, the insurance company will pay the premium for you up to your age 65 giving you same cash value build up and death benefits as planned originally. Can your 401k, IRA or retirement plan fund themselves for you if you become totally disabled?
- We could go on and on, like the unlimited contributions annually, any time access, tax deductible inside of a pension plan or other qualified plans, no mandatory withdrawal penalty etc.
Disadvantages or Cons of Whole Life insurance
- You need to be insurable to get all above mentioned benefits. If an insurance company cannot approve you for health reasons then you are out of luck. You don’t have to be healthy to buy a CD, stocks or mutual funds.
- It is a long term vehicle so if you cancel the policy in first few years then it‘s a bad investment choice. But you should not get into whole life insurance if you do not have 10+ years’ time frame.
- You need to keep the policy in force to enjoy the tax free withdrawal. The smart and knowledgeable advisor will help your figure our optimum withdrawal from your policy without making it lapse or cancel.
Life insurance, investment, financial planning, tax planning and wealth creation are much more complex than most people think or even understand. We have been helping more 3000 physicians, 1000 dentists, 3000 successful business owners and 600 independent pharmacy owners create most optimal asset allocation, reduce taxes, build proper insurance strategy and create sizable wealth for last 17 years. Please call (877) 972-3262 or contact us for the further information.