whole life insurance explained. File folders in a drawer, the prominent folder says insurance.

The Ultimate Guide to Whole Life Insurance

Whole life insurance is a type of insurance families use to protect income and provide for their loved ones in the event they pass away. It’s considered a type of “permanent” insurance, as it stays in place permanently. Besides offering a death benefit, whole life insurance has been one of the “best-kept secrets” of the 1%.

Whole life insurance probably isn’t the first thing that comes to mind when you think of the following: savings, liquid cash, and growth. However, “whole life” can actually be a great vehicle for all of the above when you understand it! At Prosperity Thinkers, we even like to call it an emergency/opportunity fund (as opposed to just an emergency fund), because you can use it to save for both!

The “permanent” status of whole life makes it a certain asset that you can trust in as you build wealth. This is the basis for why it’s considered the preferred generational wealth tool for the 1%. Yet, it isn’t solely available to the 1%. Almost anyone can qualify for a whole life insurance policy and start reaping the benefits. 

Allow us to answer your burning questions, like:

  • What is life insurance?
  • How can I use life insurance to save money?
  • Why would I want to?

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How (And Why) You Should Save Money with Whole Life Insurance

The foundation of strong money methods is to save more money, more regularly. Saving money is what separates those who live paycheck to paycheck from those who are a step (or more) ahead. When you save money, in some ways you are “insuring” your future. A savings account can help you prepare for emergencies–like a car repair–as well as opportunities–like buying a rare collector’s item or investing in a property. 

Empty wallet. Save more money...with whole life insurance.

In other words, saving money prepares you for what’s next. Even Warren Buffett, regarded as one of the greatest investors of our time, saves money. In fact, saving money is the cornerstone of his wealth–he is notoriously frugal with what he has (which is a lot). Even someone with his great wealth can see the value in having reserves.

The more important question for you may be–Where should you save money? A savings account at the bank is a good start, however, your returns are likely to be minimal. While regular contributions can still grow your savings, you won’t be able to outpace inflation on deposits alone. And, should you ever need to withdraw money, you lose out on the compounding effect of interest.

How to Start Saving with Life Insurance

For these reasons, a savings account may suffice for a short time–yet not long term. For long-term savings that can contribute to your overall wealth strategy, it’s wise to be saving with life insurance

Whole life insurance has a cash value component that allows policyholders to accumulate tax-advantaged savings with a great rate of return. (Although you lose many tax benefits if you make your policy a MEC with a single premium payment.) Not to mention, your cash value is not correlated to the stock market, so it cannot lose money. Paying your premiums is like making a deposit into your savings account, with even better long-term results. Even with the recent 7702 plan change, cash value policies have a higher rate of return than your typical savings account. 

Is Whole Life Insurance Just… Insurance?

The reason whole life insurance isn’t more widely known as a savings vehicle is that it’s first and foremost an insurance product. Life insurance is designed to protect your income–many people like to have it in place when they get married and have children. That way, if their family loses their income, there’s a windfall to take care of everyone. When a family is in mourning, it can be particularly helpful not to have the added stress of worrying about money.

However, there are a few different types of life insurance, including term insurance, whole life insurance, and universal life insurance. Term insurance is the most common because it’s widely marketed as the “least expensive” option. However, term insurance only covers a short term of your life and often expires before someone can make a claim. While the cost may not be high, there’s only a “return” if someone passes away. There is no cash value component.

How Whole Life is Different

Whole life insurance, on the other hand, is permanent. It’s in place for your whole life, so long as you pay premiums. The monthly cost of insurance is higher, however, this is because the insurance company is funding a “sure thing” as opposed to an unlikely event. 

The “trade-off” is that you can get access to a cash-value account. Your cash value is a liquid account that grows as you pay your premiums. You can access it in the form of a policy loan for any reason, which allows your account to accumulate interest and dividends uninterrupted. 

When you pay premiums on a whole life insurance policy, you know you’re getting value through certain savings, as well as the regular benefits of life insurance. Universal life insurance, on the other hand, is correlated to the stock market and can come with complications. It’s best to stay away from this type of insurance if you’re seeking certainty in your savings.

Even the Banks Buy Life Insurance

If you’re looking for more evidence that whole life insurance is a viable way to save money, consider who else uses life insurance regularly. Aside from Warren Buffett, banks are actually big proponents of whole life insurance. In fact, banks buy life insurance because it offers benefits that even their own products do not have. 

Life insurance can do for banks what it does for the average person, which is to create liquid savings with good returns and greater certainty. That, and the tax advantages make BOLI (bank-owned life insurance) an investment for banks. Though to be clear, we prefer not to call insurance an investment, because it’s not in the securities sense. 

Whole life insurance is where banks save money because banks don’t want to store their own savings. They know that when push comes to shove, the products they sell to consumers, such as CDs and mutual funds, cannot offer the same benefits. This is a perfect instance of, “Do as I do, not as I say.” And it’s crucial that when we make financial decisions we’re following the successful few, as opposed to the masses.

Banks use whole life insurance

Whole Life Insurance Has Strong Guarantees

As we mentioned, whole life insurance is a popular choice for building wealth because it’s certain. That’s why banks like it, as well as those who are building generational wealth. That’s because when you buy a whole life insurance policy, you’re signing a contract with the company. In doing so, the life insurance company agrees to certain “contractual guarantees.” 

Here are some of the whole life guarantees you can count on:

  • A death benefit when you pass on. Though this is the “point” of life insurance, it’s not a guarantee when you have term coverage. Since this is a guaranteed event, it makes sense to have guaranteed coverage.
  • Level premiums. In other words, your premium can never increase. Once your contract is in effect, the base premium does not change. 
  • Cash value access and “floor.” This is the part of your insurance you can use, and the value is net of all insurance costs (mortality costs, company expenses, and agent commission). You cannot lose cash value, unless through withdrawal. 
  • Cash value increase. In addition to having a cash value account, there is also a guarantee that the “floor” of your cash value will increase each year–even without dividends.
  • Guaranteed participation in company profits. This is technically true only of mutual life insurance companies, which position policyholders as partial owners of the company. While you aren’t guaranteed to receive a dividend each year, you are guaranteed to participate in any profits of the company in the form of a dividend.

You can even pay for additional riders on your policy that guarantee other benefits such as future insurability, disability income, and long-term care coverage–among other things.

The Benefits of Guarantees on Your Savings

Obviously, it’s clear that the guarantees benefit you, the policy owner, should you plan to buy whole life insurance. So how does this help you save money? Aside from the fact that premiums grow your cash value, the guarantees help protect your cash value. 

Without these contractual guarantees, companies would be able to take certain liberties. Term insurance, for example, does not have a guaranteed level premium. Over time, insurance companies can then increase the premium of your term insurance. This often happens when it’s needed most, and becomes unaffordable. If this were to happen to your whole life insurance, people could lose their savings. 

It’s also crucial to your savings strategy that your cash value is guaranteed to increase each year. The net interest rate applied to your cash value is often better than a typical savings account. Plus, interest is applied to your full cash value, regardless of whether or not you have a policy loan. This allows you to take full advantage of compounding interest while using your money.

What About Dividends? Are Life Insurance Dividends “Real”?

whole life insurance dividends

Many detractors criticize whole life insurance dividends simply because they’re not guaranteed each year. It’s important to understand that life insurance dividends are functionally different than stock dividends. While whole life dividends also represent earnings, like stocks, however, mutual companies must pay all profits to policyholders.

You can then reinvest these dividends into a whole life insurance policy as a paid-up addition. Once done, you can never lose the value of those dividends. On the other hand, reinvested stock dividends can decrease, causing investors to “lose” their dividends for good. 

While there are other ways to take your life insurance dividend, using it to purchase paid-up additions to your insurance can increase your overall savings and future dividend earning potential. If your primary focus is to make your savings as efficient as possible, this is a wise choice. 

Is a Dividend Just a Return of Premium?

Another criticism of the life insurance dividend is that you’re really receiving a “return of overpaid premium.” While this can be true, it’s not the whole truth. Life insurance companies make money through an extremely conservative investment portfolio of bonds. They also technically profit from premiums, loan interest, and some other factors. 

As a policyholder, you are entitled to a portion of all the company’s profits. This means that sometimes it may be a partial return of overpaid premium. Yet, it can also be other profits. This means you have the potential to earn substantially more in dividends than a simple return of premium. 

The Other Benefits of Saving with Life Insurance

We love whole life insurance as a way to make saving money automated and far more efficient than any bank account. In fact, you can use whole life insurance for targeting savings objectives, too. If you want to save for your child’s education, start a business one day, or even buy a rental property–you can. Whole life insurance is all-purpose, meaning you can use a policy loan for anything (it’s hard to say the same of banks). 

You can even have life insurance for grandchildren and children, to help them jumpstart their own savings habits. When they turn eighteen you can gift them ownership of the policy to use as they please, or keep it if they’d rather not. The cash value may even help them to fund their first car or business. 

Want to use whole life insurance for cash, instead of through policy loans? You can also do that if you so choose.

Sign that says good habits.

How Can You Get Started Automating Your Whole Life Insurance?

If you’re ready to start automating your savings with whole life insurance, you may be wondering how to choose the best whole life insurance company. Fortunately, you have a lot of good options to choose from. Ultimately, we think it’s wise to start somewhere, instead of getting stuck in analysis paralysis. That way, you can start benefiting from this strategy as soon as possible. 

Life insurance, after all, is a long-term strategy. The longer you wait to start, the longer you wait to benefit. So your best course of action is to get started. To get more answers to your whole life insurance questions, visit our FAQ page

To have your questions answered directly, we encourage you to submit a question to us or email us at welcome@prosperitythinkers.com. You are also welcome to schedule with Kim to get started today. 
To stay up to date on the latest money methods and savings tips, sign up for our Prosperity Action Pack.

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