What if you had an asset that made everything else you own even better? Fortunately, whole life insurance can do just that, if you think of it like your financial foundation. It allows you to use your other assets more freely so that your entire economic life is optimized, particularly when you reach the distribution phase of your life. We call this the “permission to spend” idea.
Why is Whole Life Insurance Foundational?
The reason whole life insurance makes such a powerful financial foundation is because it has both living benefits AND a death benefit. The death benefit is a sum paid to your heirs when you pass on, while the living benefits allow you to access an ever-increasing portion of that death benefit while you’re alive. To top it all off, you can do this in a tax-advantaged way, making it a powerful asset to have in your portfolio.
By combining your current financial strategies with whole life insurance, you can create an optimized pool of money—your cash value account. You can then leverage this money for emergencies and opportunities. It’s completely disconnected from the stock market, so you don’t have to worry about your account going up and down. Instead, you have contractually guaranteed steady growth in a cash value that’s guaranteed not to decrease. Plus, you even have the potential for additional non-guaranteed growth through dividends. Plus, the money is liquid and easily accessible… without taxes or penalties.
What is Permission to Spend?
Over the course of your life, you’re going to accumulate assets. In addition to buying a home, you may have some other properties, some bonds and equities, retirement accounts, and any other investments that you see fit to accumulate. When you reach the point in your life where you want to distribute some of these assets as income, it can be difficult to determine the correct order of operations.
After all, not all assets are very liquid, or they have tax consequences. You might even be tempted to start with whole life insurance because of its tax advantages. In the distribution phase of life, this would be a mistake. Fortunately, when you have whole life insurance, it gives you permission to spend down your other assets. You can also call this the permission slip idea. This is the true power of life insurance during this particular phase of life.
How Does Whole Life Insurance Give You Permission to Spend?
In the order of operations, whole life insurance should actually be the very last asset you touch when you’re in the distribution phase of your life. Prior to that, policy loans can be a great way to actually grow your asset base. Yet because people are so used to using their whole life insurance by the time they’re in the distribution phase, they want to lean on it first. After all, it has great tax advantages.
The problem with this order of operations is that in distribution, whole life insurance makes a much better backup than a “key player.” For example, if you want to pull an income from an asset, you can start with your retirement accounts or your equities. This will deplete or pay down the asset over time, yet you’ll still have the whole life insurance as a backup. You won’t disinherit heirs, thanks to the death benefit, and you’ll actually be passing those tax advantages to your heirs, saving the most money on a generational scale.
If you started with your whole life insurance, you’d be reducing your tax-free death benefit to heirs. You could leave the equities to them, yet the amount will be far reduced after they pay taxes. In addition, if you deplete your whole life insurance, you’re left with assets that are dependent on the stock market, meaning that you have to withdraw money regardless of market performance. In a down year, this can quickly eat away at your funds. And you can’t really use other assets to bail you out of tricky situations the way life insurance can. So by using the life insurance first, you’re actually limiting how many options you have.
Next in the Order of Operations
Another way to create income later in life is to do a reverse mortgage. Whole life insurance gives you a permission slip to do this because the death benefit could be used to bring the home back into the family if your heirs wish. It also means that your heirs won’t be stuck with a house they don’t want. It provides your kids with options on both sides and gives you another source of income.
Without the whole life insurance to give you permission, it’s probably pretty unlikely you’d even consider a reverse mortgage. After all, you’d have nothing to fall back on, and nothing to leave to your heirs in the end. Yet with whole life insurance, you’ve created an entirely new option for yourself without the danger of disinheriting anyone.
Extend Your Income
We’ve found that when people use their whole life insurance as a permission slip to consume other assets, they can actually extend their income by decades AND have money to leave to their children. It’s truly a win-win-win scenario if you can create some peace of mind for yourself, use what you have without running out, and still have a legacy to give.
Want a really technical look at the permission to spend concept? Tom Wall has written an incredibly detailed book about the concept, aptly called “Permission to Spend.”
If you’d like help getting a policy started so that you’ve got the right backup, let’s talk. You’ll be glad you have the whole life insurance to fall back on and give you permission to spend. Book with us today to get started or email your questions to welcome@prosperitythinkers.com.
