Whole life insurance provides a broad range of financial benefits, and has proved its long-term value over generations. While many financial instruments faltered during the recent “Great Recession,” whole life insurance provided families and small business owners with a much-needed source of funds and retirees with access to additional income — all the while building guaranteed cash values, and paying death benefits to beneficiaries.
For the last two decades, financial pundits have discounted the benefits of whole life insurance in favor of trendy, equity-oriented vehicles that seemed to offer higher returns at lower costs, often forgetting to contemplate the risk-reward trade-off. As Life Insurance Awareness Month begins, now is a good time to set the record straight on 5 common myths about whole life insurance.
Myth #1: You only benefit from whole life when you die.
Facts: That’s really wrong! Participating whole life policy owners enjoy substantial “living” benefits during their lifetime of coverage.
• “Participating” (or “par”) insurance company policy owners generally receive annual dividends after the first policy year. That’s because there are no outside shareholders in a mutual (“par”) life insurance company.1
• Dividends can be used to fund policy premiums or to buy more permanent increments of death benefit and cash value.
• Access to the policy’s cash value is typically available through withdrawals and tax-free loans 1
• Alternatively, the cash value of the policy can be pledged as collateral for a tax-free loan.
• Small business owners may borrow against their policies to provide working capital.
• Wealthy individuals use whole life in their estate planning by setting up an insurance trust to pay estate taxes from the proceeds of the policy.
• Retirees who own permanent life insurance can look to generate more cash flow from their other assets because of the certainty and inevitability that the ultimate death benefit will deliver to their heirs. They may elect higher paying annuities or spend-down other retirement assets rather than living only on current yield.
Myth #2: Whole life is a lousy place to put your money.
Facts: Um, no…
• The value of a whole life insurance policy is uncorrelated to the stock market and is largely guaranteed by the insurer, so that neither death benefits nor cash values are affected by declining markets. Therefore, a whole life policy can serve as the stable component of a financial strategy.1
• You purchase whole life insurance to protect your family in the event of your death. However, it’s much more than that. It’s actually one of the most valuable assets in your financial portfolio. A whole life insurance policy has a real return that performs competitively within other high-quality, fixed return assets.
And, depending on how you use it, it can end up being two assets and two returns — a living asset with tax-advantaged distributions — and an income-tax-free and potentially estate-tax-free death benefit.
Myth #3: Once you retire, you should cash in your life insurance policy.
Facts: Not so fast …
• Retirement is no longer the appropriate time to drop life insurance — it’s the time when many people realize the importance of buying it! Continuing whole life as part of a financial strategy provides an additional level of security, financial freedom and a legacy for loved ones, even if other assets are used for retirement. Moreover, many situations involve estate liquidity problems that can only be solved through the availability of immediate cash.
Heirs can use the proceeds of a whole life policy to pay estate taxes. Families with real estate, closely held businesses, leveraged investments or margined stock portfolios — to name just a few categories — often use life insurance to offset the significant cash liquidity demands on their estates.
• Whole life also provides a good source of tax-free funds for big-ticket items that could put a dent in a tight retirement budget — such as a grandchild’s college tuition or wedding. Through the loans and withdrawals available to whole life policy owners, an individual can supplement retirement income with tax-free funds if the distribution is structured properly and the policy is not a Modified Endowment Cotract.