Life Solutions

Protect What Matters
Indexed Universal Life Doomed for Failure                                                            Part 3

Whole life was the standard choice for those who wanted insurance for their whole life. This has been the case since the 1800's. Some financial advisers believe that you don’t need life insurance for your whole life. I highly disagree and will explain why shortly. What I have found is that the wealthier someone is, the more whole life insurance he/she want to have. Why is that? Because of the benefits it provides. It is an efficient product that provides tax advantages, it is safe, and it is predictable. As you learn more about whole life you will realize why it becomes a logical place to store and amass wealth. However, that will be covered in depth in another section. For now, suffice it to say that those that die without life insurance, didn’t plan really well.


Insurance societies and mutual fund companies were formed way back in the 1700's using somewhat of a whole life model. Now, it is important to understand that whole life insurance is not based on the term life model, where the price goes up at the end of the term. Whole life policy premiums are calculated by individuals called actuaries. Those actuaries are really good at pricing long time mortality tables and the growth rate of companies’ investments. Actuaries cannot tell you when “YOU” are going to die, but they can tell you within a small margin of error how many people your age are going to die this year. They use that information to calculate the premiums to be charged on whole life policies. It is based on probability, longevity, and asset estimated growth.


Whole life was designed to be there for your entire life or whole life. The objective of the whole life product was to have a death benefit regardless of when you die, as opposed to having a death benefit for a specific window of time such as is the case with term insurance. Early adopters of whole life bought shares in a mutual company or “into” a society. The company/society then priced the shares in such a way that premiums collected would cover the expected deaths for that year and would allow for the company to build assets. This made it possible for the families of the deceased to get paid by turning the shares back into the company, regardless of when or at what age the death occurred. Additionally, the insurance company would pay a dividend each year to its shareholders. The dividend paid out was calculated by the actuaries predicting the number of claims the company was going to have that year, and predicting the asset growth. The idea was for the life insurance company to grow the share value, pay a dividend, and pay the death benefits to those families that had a death claim.


Modern day whole life mutual companies do something similar. In a mutual dividend paying company, there are no stock holders. Every policy owner is part owner of the company (like owning shares). Whole life companies are positioned to pay death benefit claims, and build cash value at the same time. This cash value can be accessed by the policy owner at any time and for any use. This is referred to as “living benefits”. Mutual life companies pay a dividend each year. The dividend is not guaranteed to get paid. However, some insurance company have never missed paying a dividend in as long as 170 years.


Because the policy is designed to last for your whole life, the premiums will never increase; they are leveled, unlike term insurance. As a matter of fact, contrary to term insurance, with whole life the cost of insurance becomes less expensive the older you get. Additionally, whole life is designed so that at some point in time (you decide when) you own your insurance policy without paying additional premiums; sort of like paying off a mortgage. After it is paid off it becomes an asset, and you own it free and clear. This is an extremely attractive benefit that you will enjoy during your retirement years, when you’re on a fixed income. 


Another benefit is that once your insurance policy is paid off, the cash value inside it will continue to grow and compound as the dividend is paid each year. Now, understand this, the cash value can also be accessed during your life time at any time for any purpose and for any length of time. Unlike government plans (IRAs, 401ks, 403bs, etc…), there are not 59 ½ rules, no 70 ½ rules, no penalties, etcetera. If you want to use money in your policy, the insurance company would actually lend you money out of the company’s assets and simply use your money as collateral, allowing it to remain in your account for growth and compounding. If you need additional income during your retirement years, you may take the dividend in cash rather than reinvesting.


Because you can use the money in your whole life policy at any time, it is great as an emergency fund and it is great for opportunities that may come your way. For retirement purpose, a well-designed whole life policy is one of the highest income streams available in the safe money field. When comparing it to a CD or bonds, a whole life has as much as 500% higher income streams. If you need still more income during your retirement years, you may also spend down your cash value. The premium that you pay for your whole life policy covers the cost of insurance and also builds up your cash value. The tax-free benefits are accessible to you while you are still living and when you pass, your beneficiaries will receive a tax-free death benefit.


So, there you have it. You should have a good understanding of term life as well as whole life. Two separate and very distinct products designed for different purposes. Chances are that you will use both types at different phases of your life.


Now, let’s move to the third type of life insurance; Universal Life.