- 1 What is whole life insurance?
- 2 How can whole life insurance be used as an investment?
- 3 1. Permanent Life carries Cash value.
- 4 Whole Life Premiums do not change.
- 5 Pays a dividend.
- 6 4. Death benefit.
- 7 5. Good fixed income investment.
- 8 6. You can borrow from it easily, and pay yourself back.
- 9 7. Ultra-Low Risk
- 10 8. Tax free accumulation.
- 11 Bank on Yourself / Infinite Banking / etc.
- 12 The Best Whole Life Insurance Companies
- 13 FAQS on Whole Life Insurance
What is whole life insurance?
Whole life insurance (also called Permanent Life Insurance) stays in effect for the insured’s entire lifetime. It also carries a cash value that can be redeemed or borrow against. Dividend paying (with careful selection) on cash value. Pays death benefit in case of insured’s death. Great for fixed income.
How can whole life insurance be used as an investment?
8 ways and reasons. Cash value as an asset. Fixed premiums never change, unlike term insurance.
1. Permanent Life carries Cash value.
This chart shows the approximate cash value for an initial sum of $10,000 cash value. You’d have to pay in $15,500 or so the first year to get $10,000 cash value. From an investment point of view, that’s not really so great. However, think of the initial paid in premium as the insurance cost. You’d have a death benefit of nearly $200,000 for this.
As you can see, the value passes the paid in value during year 7. We’ll look at an actual illustration in a bit.
- Whole Life Premiums do not change.
Your premiums on whole life insurance never go up. On some policies, you can pay more to get greater cash value. That’s recommended. By contrast, with term life, you get much lower rates when young, but then they expire and carry no cash value. Then your rates will go up quite a bit. The difference in term life between a 30 year old and a 60 year old is jaw-dropping. The 60 year old rate is pretty close to the whole life rate of a 30 year old.
- Pays a dividend.
These policies pay a guaranteed amount plus a non-guaranteed cash dividend. The dividends have been declining due to the low cost of money, especially since 2008, but they pay a healthy 6.2% in general. Consider having one of these policies for your children. When they’re ready to retire, it can look like this from an initial $15,000 input. They could stop rolling the div into the policy and draw out $25,000 per year in income without diminishing the cash value. Of course the line would go flat, then.
Unfortunately, the marketing of these policies is a bit deceptive and I don’t like the way they do it. I looked them over a long time before discovering something negative – the dividend rate has nothing to do with your cash value or money paid in. The 6.2% dividend is the share of company profits they pay out to benefit holders. The dividend on your cash value can and will vary from this. In the illustration, it’s about 4.3% of money paid in. It’s not awesome, and it’s not presented very transparently, but it’s better than a poke in the eye. And the cash value is stable. Unfortunately, it’s only a little better than inflation. Or worse, depending on the inflation rate.
4. Death benefit.
The death benefit is mostly a lot lower per dollar than term life. But that’s because term life almost never pays out. More than 95% of term policies expire worthless.
5. Good fixed income investment.
Whole life typically pays around 6.2% with a good company. Carefully select the right companies and use only mutual companies. Public companies payout dividends to shareholders, not policyholders, so returns are far lower. They are BAD investments. A mutual company has has policyholders as shareholders.It typically takes 8 years for the dividends paid out to get the principal back up to the paid-in amount. After that, the investment tends to do very well. Now that is a lag time, but when tax benefits, estate benefits, and posterity protection are factored in, it is sufficiently balanced.
6. You can borrow from it easily, and pay yourself back.
Whole life policies allow you to borrow against the principal held in the policy. It’s easy, too. No credit check, nothing. It’s your money and if you want it, just tell them to send you a check. Best part is, the full amount still pays dividends, but it’s offset against the interest accumulated by the borrowed amount. Generally, the dividend paid to you will have a higher rate than the interest paid for the loan.
Obviously, this can amount to a way to pass on an inheritance and still be able to spend the money in retirement. It’s quite a cool system.
7. Ultra-Low Risk
These companies have paid dividends for over a hundred years, right through the Great Depression, dot-com crash, and the financial crisis. The investments are often government loans for large projects or other large-scale real estate loans. These are strongly vetted and have an excellent history of near zero defaults.
8. Tax free accumulation.
There are limits to the tax-free amounts, typically the amount paid in, but these include the dividends, so it’s not quite clear when and how taxes would be applied. Nevertheless, other limitations apply. The policy cannot be funded all at once, but requires a minimum of 8 years to avoid being MEC’d. A Modified Endowment Contract may be useful for certain cases. The dividend benefit is certainly greater and more immediate, but for many the tax benefits take long-term priority.
Bank on Yourself / Infinite Banking / etc.
Whole Life has a long history. It’s been used for over a hundred years by they wealthy. It’s a great means to protect estates against taxes, especially, since whole life is tax free, but the memory of it has been lost in recent times. Honestly, the wealthy still use it, but the middle class now uses term life insurance. Talk about sunk costs!
A guy named Nelson Nash revived it as Infinite Banking. It was packaged a bit awkwardly and some of the downsides were missed, but the rebranding was moderately successful. Now a lot of people practice Infinite Banking (Bank on Yourself is a stylized version for the digital age). Is it really different from plain old whole life insurance?
Not really. The discussion revolves around ‘borrowing’ money from your policy to take vacations and start businesses or buy property, etc. Sure, it incorporates some financial management concepts to upscale the content, but some of it reads a bit deceptively, imo. It talks about borrowing money, then you get paid the interest. But you’re paying the interest, so that’s pretty weak logic. You do save the interest you would have paid to the bank, but the overly inflated writing makes it sound like you’re getting money on both sides. You’re not. You’re not paying interest on money you don’t borrow from the bank, but you’re not really paying yourself. You’re just saving more money in your insurance account, but not having the money straight away because it comes out of your paycheck.
Illustration of a Whole Life Policy
This is a 20-year illustration. As you can see, cash premiums of $11,000 a year the first 8 years, then nothing. And after eight years, the dividends pay the premium. it’s worth noting that the total cash value reaches the paid-in value in year 8. obviously the death benefit always exceeds the paid-in value. That’s because this is a Mutual Insurance Company. Public insurance companies do not pay appreciable dividends. I have seen insurance policies where is the death benefit was less than the total amount paid in. What a loser policy (Sorry, Dad, but…)
Graphs courtesy of Equitable Insurance of Canada
The Best Whole Life Insurance Companies
All of these are good. In the US:
- Mass Mutual – pays best dividends. Highly recommended.
- New York Life
- Ohio National
- Met Life
- Lafayette Life
- Equitable Life
FAQS on Whole Life Insurance
Why is whole life insurance a bad idea?
It’s definitely not. It costs quite a bit more than term, so term life can make sense for a short period. But the value remains as an asset of the policyholder, which can be drawn on, so the comparison is faulty. Term life is sunk value, irrecoverable.
Which is better, whole life or term life insurance
In the short term, term life is better. In the long term, whole life wins hands down. Term life is cheaper initially, but all premiums are permanently lost. After 8 years of whole life, the cash value is usually equal to the amount paid in. At that point, the death benefit is ‘locked in’ and can never be lost. With term life, the death benefit disappears at the end of the term.
How does Whole Life Insurance work?
With whole life, the death benefit is guaranteed for life, unless premiums are not paid. Premiums paid accumulate cash value. With mutual companies, dividends are also paid on that cash value. Cash value can be borrowed against, no questions asked. Earnings and estate transfers are tax-free.
What are the disadvantages of whole life insurance?
Premiums are much higher for equivalent coverage. That’s the only real disadvantage. Everything else is far superior for a whole life policy.
What are the pros and cons of whole life insurance?
Cons: Much higher premiums for the benefit. Pros: Retained cash value. Fixed income. Ownership share (with mutual companies). Useful asset. Cash-free earnings. Cash-free estate transfer.
Which life insurance is best?
Whole life is definitely better than term. Whole life insurance retains a cash value. At about 8 years, that value will equal the amount put in. Plus it has a lifetime death benefit for your heirs. And it’s relatively inexpensive if you’re young.
That being said, term life insurance is very cheap when you’re young. That’s because payout rates are less than 1% for someone under 30.