With the rise of term life and the advent of new products, the life insurance industry has adopted a very narrow and negative focus on whole life insurance.
Popular financial media have limited the debate over coverage choices to examining the investment value of policies. This shift, however gradual, has driven purchasing trends over the last 20 to 30 years.
As a result, the public too often discounts the true macro intergenerational benefits of a product that provides not only guaranteed distribution at death, but also critical cash accrual that can help fulfill various financial commitments while clients are still living.
Consider the following misperceptions the life insurance industry faces.
WL insurance is often referred to as an expensive drain on an investor’s funds and a drag on any retirement savings program offering an average annual return that doesn’t keep up with historic averages for the Standard & Poor 500. Investing in the stock market is portrayed as a much better way to accumulate wealth and as a more sound investment strategy over the long-term, regardless of fluctuations in the value of equities.
Advice is often summed up in the popular newsstand mantra, “buy term, and invest the rest.”
The “buy term” strategy rose to fame in the 1980s as a cheaper alternative to permanent protection. This was at a time when interest rates soared to double digits. The crux of this theory, however, lies in the “invest the rest” portion of the approach–something only a very few well-disciplined investors have been able to achieve.
Another misperception from the financial world is that life insurance is an “extra” that somehow exists outside of a sound financial strategy. Life insurance is described a necessary evil bought solely for its death benefit features for the short-term. Investors are told, “When you’re older, life insurance won’t be necessary.” So, financial reps advise consumers to shop for the cheapest option available, as they do with homeowners or car insurance.
As new products enter the realm, however, the shortsightedness of these misconceptions is coming clear. As stock market volatility continues to impact spending, more and more people are seeking alternative products that adapt to their changing needs. Here, whole life shines. Some examples follow.
Wealth accumulation. With whole life, policyholders can be assured of the deliverability of the death benefit and, therefore, leverage its presence by using other assets during their lives.
Though not typically viewed as a traditional retirement tool, the tax-deferred build-up of cash in a WL can supplement income in retirement and, from a planning perspective, enable clients to pursue a more aggressive asset allocation mix. Thus, clients who failed to achieve a specified growth target for retirement can use the cash value as a much-needed supplement to meet a variety of financial commitments.
Case in point: a $1.8 million amortizable portfolio with WL offers more cash flow than $2 million in income only.
For those in need of long term care benefits, an enhanced accelerated benefit that resembles a rider allows access to more than the policy’s cash value. In fact, the living benefits in WL enable policyholders to meet a variety of financial commitments: college savings, supplemental retirement income or LTC costs.
Unlike borrowing against a 401(k) or bank financing, WL policy loans aren’t subject to a credit check or penalty fees, though any amount that isn’t repaid will be deducted from the death benefit and cash-surrender value for the policy’s beneficiaries. And, WL dividends can be used to pay down premiums or increase the policy’s death benefit.
Wealth preservation. People who enter their retirement years begin to shift their concerns from lifestyle accumulation to legacy preservation.
This is when understanding the need for life insurance becomes crystal clear, due to its asset protection features. This is also when the “could have, would have, should have syndrome” of distribution planning rises to the surface. That is, clients start taking a closer look at the financial decisions and tools used during the accumulation phase and how those now position the client for the preservation phase. In many instances, clients find they were focused on the micro orientations of building wealth, not the entire plan.
By comparison, WL insurance is a valuable tool that can safeguard assets at the time of the policyholder’s death. Estate taxes can wipe out the accrued value of retirement accounts, real estate and businesses by forcing investors and beneficiaries to liquidate assets. WL can ease the sting while protecting the wealth a holder worked so hard to accumulate. Over time, such preservation of wealth proves to be the best rate of return.
This, however, is not always brought to the surface when clients first learn about and choose life insurance.
Wealth preservation should be an integral part of a client’s financial strategy, right from the start. While WL’s living and death benefits are critical, life insurance should never be sold solely as an investment vehicle based on its merits. Rather, incorporating WL as part of a client’s entire asset allocation provides a level of confidence to investors and beneficiaries with the ability to distribute wealth over generations.
In sum, it’s time to help clients take a new view of WL insurance. Too often, this insurance is pitted against an investor’s assets, stock and mutual fund holdings, a parallel that other life products are spared. What people need to learn is that WL often plays an important role in the protection of portfolio assets.
Along with other savings and investment vehicles, WL helps people maximize wealth and retirement income, and provide a level of confidence to investors and beneficiaries through its tax-free, guaranteed death benefit. This combination positions WL as a one-stop asset; it enables accumulation and protection of value over time, providing the foundation of a sound financial strategy.
Helping clients better understand their future needs will require the industry to reintroduce WL and counter the common misperceptions about this valuable product.
Matthew Gaglio, CEP, is president of Integrity Advisors, Pension Consultants, Inc., a Rye Brook, N.Y., general agency of The Guardian Life Insurance Company of America. His e-mail address is