The 6 biggest myths about dividend-paying whole life insurance

First off, full disclosure: I’m a financial investigator and an educator, not a licensed financial advisor. I’ve spent the last 25 years investigating more than 450 different financial products and strategies. 

Of all of those products, my very favorite is dividend-paying whole life insurance. That’s because it enjoys an unmatched combination of advantages, which include safety, guarantees, liquidity, control and tax advantages. 

If you sell dividend-paying whole life, you probably hear many of the same objections to it over and over. But my research has shown these objections are based on myths and misconceptions. So here are the six biggest myths about dividend-paying whole life — and the truth about each of them. 

If you don’t sell the product, it may be because you have some of the same objections. Perhaps this will help open your mind… 

Myth No. 1: Dividends are “just” a return of premium.

One of the objections you probably hear about dividend-paying whole life insurance is, “What’s the big deal about dividends? They’re just a return of premium the company overcharged you.”   

Recall that dividends are paid when the company’s income less its expenses exceeds its projected worst-case scenario. Technically, the IRS defines dividends as a return of excess premium and therefore not taxable. 

However, over time, those dividends can exceed the premium you paid in by a significant amount. If that’s the result of “overcharging,” I say, “Bring it on!” 

Myth No. 2: The company “keeps” your cash value and “only” pays you the death benefit.

The financial experts often complain that the insurance company “only pays you the death benefit and keeps your cash value” when the policy owner dies. 

Technically that’s true. But how do you explain this: I posted one of my dividend-paying whole life policy statements on our website. It shows how if I’d died on the date the statement was issued, my family would have received a check for $381,776, which is a few thousand dollars more than the original $250,000 death benefit and then-current total cash value ($128,361) combined. 

It’s amazing to me that so many people — including many experts — hold whole life insurance to a totally different standard than other financial vehicles. For example, if you have $100,000 of equity in your home and you sell it for $250,000, do you expect to end up receiving both amounts, for a total of $350,000? Of course not. 

However, as I just demonstrated, a dividend-paying whole life policy can deliver that advantage. 

Myth No. 3: The cash value in a whole life policy grows too slowly.

Financial pundits say that your cash value grows much too slowly in a whole life policy. They claim you might not have any cash value at all in the first couple of years. 

True for some whole life policies. However, more and more advisors are incorporating riders that dramatically accelerate the growth of the cash value in the policy, especially in the early years of the policy. 

In fact, adding these riders to a policy maximizes both the cash value and the death benefit over time. 

In addition, adding these riders allows clients to use their policy as a powerful financial management tool from day one.