Dispelling The Myths and Misinformation Of Whole Life
September 27, 2016 by Brad Crockett
Our clients are often confronted with conflicting advice. Case in point is the myriad of varying opinions regarding whole life insurance.
Many investment gurus continue to publicly discount the benefits of whole life insurance. As a result, many families have failed to realize the broad range of financial benefits whole life insurance provides.
In times of economic uncertainty or stock market volatility, whole life insurance can act as a safe haven offering small business owners with capital and retirees with access to additional income — all the while building guaranteed reserves, declaring dividends, and paying death benefits to beneficiaries.
Common Myths
So before we discount whole life insurance’s benefits in favor of the latest financial fad, let’s set the record straight on several common myths that you and your clients may encounter:
Myth #1: You only benefit from whole life when you die.
Reality: Whole life policy owners enjoy substantial “living” benefits during their lifetime of coverage.
Participating insurance company policy owners generally receive annual dividends after the first policy year. That’s because there are no outside shareholders in a mutual life insurance company. Dividends1 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 loans2. Alternatively, the cash value of the policy can be pledged as collateral for a tax-free loan.
Small business owners may borrow2 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.3
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.
Myth #2: Whole life is a lousy place to put your money.
Reality: 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 – making it one of the most valuable assets in your financial portfolio
A whole life insurance policy has a real return that performs competitively with other high-quality, fixed return assets and can serve as a stable component of an overall financial plan. Depending on how one structures it, the policy 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.
Reality: Retirement is no longer the appropriate time to drop life insurance — today it’s the time when many people realize the importance of buying it!
Continuing whole life as part of a financial plan can offer the luxury to spend down other assets first, since you would already have in place a financial foundation for the next generation — the legacy is secure. Through the loans and withdrawals available to whole life policy owners, an individual can supplement retirement income with tax-free funds. 3, 4
Affluent investors may have 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.5 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. Establishing a “special needs” trust through the policy can provide financial care for family members with health issues, and life insurance is ideal for that purpose.
Myth #4: Whole life is too expensive.
Reality: In considering whether to purchase whole life or to “buy term and invest the rest,” you must take into account not just the premium cost, but also the length of time you want coverage and your ability to “invest the rest” profitably.
Term insurance isn’t designed for lifetime coverage. While term life is typically affordable during the primary premium guarantee period (five to 30 years), annual premiums quickly escalate to an unaffordable level once the guarantee period ends. With term insurance, the policyholder does not accumulate any cash value. At the expiration of the term of the insurance, the policyholder owns nothing, in contrast to whole life insurance, where premiums build cash value that the policy owner can access.
Whole life insurance has flexibility in how you initially structure the contract. Whether you structure around long-term premiums or blending in term within the same policy, you may get a product premium that is more competitive with an extended level-term product, while creating the potential for long-term increases in death benefit.
Myth #5: Crowd funding sites can now raise fast cash for unexpected expenses like funeral costs so I don’t need a life insurance policy.
Reality: Relying on the kindness of strangers is a risky and unpredictable way to ensure your family’s financial security.
Many families are unprepared for the financial impact that a sudden death brings. Funeral and memorial crowd funding is gaining in popularity on sites such as GiveForward, GoFundMe, Plumfund and YouCaring, however, there they offer no guarantees that you will receive any contributions – let alone enough to cover funeral and long-term living expenses. Life insurance was designed specifically to protect loved ones against the unknown and has proved its long-term value over generations.
Beneficiaries receive a guaranteed, lump-sum payment if you are no longer around to take care of them. While staying covered for life, you can also build a significant cash asset that’s not dependent on the rise or fall of the market at any time. You can borrow against the cash value portion if you need money for other things in the future: a down payment for a home, college funding, or a business loan. Crowd funding offers none of these benefits and no guarantees and is too risky a plan to base your family’s financial future on.
One final thought: The safety and security of your whole life policy depend on the insurer from whom you acquire it. That’s why it makes sense to buy whole life from a well-established mutual carrier that has decades of experience in the industry and maintains a high credit rating.6
1Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.
2Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
3 Guardian, its subsidiaries, agents or employees do not give tax, legal, or accounting advice. You should consult your tax, legal, or accounting professional regarding your individual situation.
4 Assumes the policy is not a Modified Endowment Contract (MEC). A Modified Endowment Contract (MEC) is a type of life insurance contract that is subject to last-in-first-out (LIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution may also be subject to a 10% federal tax penalty on the gain portion of the policy if the owner is under age 59 ½. The death benefit is generally income tax free
5 Source: Richard M. Weber, MBA, CLU, AEP; and Chris Hause, FSA, MAAA, CLU; Life Insurance as an Asset Class: Managing a Valuable Asset.
6Financial information concerning The Guardian Life Insurance Company of America® as of 12/31/15 on a statutory basis: Admitted Assets = $48.1 Billion; Liabilities = $42 Billion (including $37 Billion of Reserves); and Surplus = $6.1 Billion.
2016-27848 Exp. 8/18
by Brad Crockett, CLU, ChFC
Mr. Crockett is National Sales Director, Risk Products Distribution, The Guardian Life Insurance Company of America® (Guardian), New York, NY 10004. Visit guardianlife.com.
