In uncertain times, prudent people do what they can to cut costs. This year, it’s been easy to cut back on dining and shopping—unless the shopping is online! The U.S. savings rate is up to record levels now. You may have even trimmed your insurance expenses, especially if you are no longer commuting to work. However, there’s one type of insurance you DON’T want to trim unless necessary.
Whole life insurance is often thought of as a “cost” or liability—a subtraction on the balance sheet. But as you will see, whole life insurance is actually an asset.
We think of savings accounts, bank CDs and brokerage accounts as assets. Whole life insurance needs to be moved to that side of the ledger as well.
Of course, whole life insurance is a also a risk management tool. However, unlike other insurances, the only way to lose money with a whole life policy is to cancel it!
“If” Versus “When” Insurance Products
Most insurance products protect against a potential risk that may or may not happen. You pay your premiums to protect yourself against the “what if” scenarios.
You could get in a car accident—but you probably won’t.
Your house might catch on fire—but the odds are slim.
This makes most kinds of insurance “IF” insurance. If the insurance event happens, your insurance will pay. If it doesn’t, you are out your premiums. It’s a financial loss, although it may be a very fair price to pay to have peace of mind and protection against devastating loss.
Term life insurance is also an “IF” insurance. With a 20-year term policy, the life insurance will pay if the insured passes within the time frame of the policy. About 99 percent of the time, term policies expire and do not pay a death benefit—which is a good thing!
Whole life insurance, on the other hand, is a “WHEN” insurance. That’s because it is permanent life insurance. So it’s not a matter of “if” a death will occur, but when. As my husband Todd says, “The mortality rate hovers right around 100%!”
If you had a crystal ball and somehow knew that your home would one day be damaged in an earthquake or flood, you’d be sure to obtain earthquake and flood insurance. You would keep it updated at all times and if given the chance—you would opt for a permanent policy with level payments! You know you’ll need the insurance—you just don’t know when.
And if the policy’s coverage continued to increase—better yet! Homes tend to grow more valuable over time, just like a person’s human life value (HLV, a term used in life insurance and in legal matters). And what a gift it is to know that life insurance can never be cancelled and insurance premiums will never go up!
Now, what if this permanent life insurance steadily built up a savings or cash value account for you? Years down the line, if you are alive and well, you will have access to an amount that far exceeds the premiums you paid. You will be able to use it for emergencies, investment opportunities, or anything else!
In the early days of a whole life policy, it has little cash value, and the death benefit (or face value of the policy) may be more than the premiums paid. But that soon changes. In the later years of a policy, when you have paid much more in premiums, the death benefit and the cash value both grow and surpass all premiums paid. As you can see in the chart below, the face value of a policy can triple or quadruple over time!
This is why life insurance is an “asset” rather than a “cost”: you/your family can never lose money on a whole life policy. (That is, unless you cancel it or violate the terms of the policy.) Unlike other insurances, the certainty of the death benefit and the cash value growth transforms whole life insurance into an asset, not a liability.
In the meantime… your policy builds cash value. Cash value represents the equity or the liquid part of your policy. It is money you can use that grows in value each year. You can access the cash value by borrowing against the policy or withdrawing it.
An Example of How Life Insurance Works
Below is a brief summary of how a policy might perform for a 50-year old woman. We used information from an actual illustration and simplified it down to 3 columns in five-year-increment snapshots.
On the left: the total cash outlay for premiums plus maximum paid-up additions. (PUAs are optional and recommended to help cash value grow faster, if that is your goal.)
The middle column represents the estimated cash value based on the current dividend scale. (Dividends are historically reliable but not guaranteed.) The cash value represents the liquidity or equity in the policy. It can be accessed through withdrawals or loans.
The right hand column shows the death benefit or face value of the policy. This is the total value of the policy including the cash value. (Note how the death benefit/face value of the policy grows along with the cash value.)
As you can see, the policy is ALWAYS worth more than what you have put into it—sometimes MUCH more!) Note that if you live long enough, your cash value eventually “catches up” to the rising death benefit. And the death benefit is not taxable in most situations, which raises the value even higher!
This is why we say that whole life insurance pays YOU! There is never any point in time when you or your family would not receive back substantially more than what you put into the policy.
Minimize Costs, Maximize Savings!
We train ourselves to minimize costs. But if life insurance is an asset, why would you want to minimize it? You want to minimize costs and maximize your savings! Of course, you want to save as much as possible to build and grow your assets. Whole life insurance helps you do exactly that. The cash value gives you liquidity you can use when needed or desired.
This is why we say that life insurance pays YOU! There is never any point in time when you or your family would not receive back substantially more than what you put into the policy. Whether you pass unexpectedly or live to 100 or beyond, whole life insurance builds your liquidity and your legacy.
An inheritance for every child.
In recent days, there are conversations rising about wealth inequality and generational wealth. You might have come from a wealthy family or a working class family. You might have a college degree and mentors, or you might have had to figure things out on your own. The exciting thing is that life insurance allows you to create a legacy with the stroke of a pen! Even if it is extremely modest (the numbers above are scalable), you can leave an inheritance for your loved ones.
There is no better way to ensure that spouses and/or future generations are supported than life insurance. When the insured passes, the death benefit can be used to replace a breadwinner’s income, pay for final expenses, or perhaps provide a college “scholarship fund” for grandchildren. Thanks to life insurance, family members don’t have to add a financial emergency on top of a time of grieving and transition. And because of the permanent death benefit, you will never out-live your policy as most people do with term life insurance.
But whole life is not just “death insurance.” It is life insurance, and it supports you throughout your life! Whole life cash value provides a perfect emergency/opportunity fund to fix a leaky roof, provide a home down payment or sustain a family through a spell of unemployment.
Whole Life Insurance is an Asset.
Hopefully now you see why whole life insurance is an asset—not a cost! Why every premium payment provides a return.
Since mortality is a “when” and not an “if” event… why not insure for the inevitable? No matter how long you live, whole life insurance has your back. Reach out to Partners for Prosperity for a customized illustration that will show you how a policy might perform for you! You can schedule an appointment with Kim, or simply email us to request a quote in the form of an illustration.
Even if you might not qualify for life insurance, there are “workarounds” we can share with you. For instance, you can own insurance on your children or grandchildren and transfer ownership of the policy to them in your later years.)
Find out why whole life insurance has been used by families for generations: “Whole Life Insurance: A Firm Financial Foundation.”
—By Kim Butler and Kate Phillips