By BOB CUNNINGHAM
Last week, I made the pronouncement that THE best thing you can do with your savings and investment dollars is to put them into a certain type of dividend-paying, whole life insurance. I referred to the features and benefits of such policies, to illustrate why I have come to feel so strongly positive about these products.
But some additional perspective might be helpful, in the form of direct comparisons to the government-sponsored, conventional approaches promoted by so many self-proclaimed personal finance experts today. (Remember, I am NOT an expert… but I am a licensed life insurance agent in California and, at the risk of coming across as full of myself, somewhat more knowledgeable in this area than most because I’ve studied this subject for most of the last decade, and I’m a graduate of SOHK – the School of Hard Knocks).
Okay, so why whole life insurance? Here’s a breakdown:
Reason No. 1: These policies offer clients virtually zero risk. You’ll notice the word ‘virtually’ in there. OK, technically, the insurance company that accepts your money and writes your policy could go out of business. Any entity can. But insurance companies rarely fail. According to consumer research firm A.M. Best, less than 0.6 percent of life insurance companies have gone bankrupt outright since 1950. Only a handful more had issues serious enough to require a take-over. Some might point to conglomerate AIG and its need for a bailout about a decade ago. But the equities investment arm of that company is what was on the brink of failure, not insurance.
And consider this: If an insurance company does go down, the Guaranty Association will “insure the insured,” covering your cash values up to a certain figure and percentage. Values and coverage vary depending on size, age of the policy, etc. but according to the California Department of Insurance, 80% of the cash value or death benefit (whichever applies) is paid typically.
Also, only a few of the more than 2,000 insurance companies nationally offer the specific types of dividend-paying whole life insurance that works best for this approach. Stick to a company you’ve heard of and, well, your risk of losing your money is infinitely less than having it stuffed under your mattress at home.
Reason No. 2: YOU control your own money at all times. According to Douglas Andrew, the author of several pioneering personal finance books including his most famous, Missed Fortune, the most important characteristics shared by truly astute investments are: safety, liquidity, and a rate of return. He also adds tax-favored status as a factor that separates wise investments from the rest.
No. 1 above covered the aspects of safety, and the second point is the idea that you can access your money pretty much whenever you need it. That is a seemingly basic but actually uncommon and invaluable control. Conventional methods, such as saving in your company’s 401K Plan or in an Individual Retirement Account (IRA), immediately restrict you from your own funds unless you’re willing to pay penalties. With both 401Ks and Traditional IRAs, you pay a 10% penalty plus the full income tax hit if you try to get at your money before age 59 1/2 and/or if the account has been open less than five years. In a Roth IRA, you can pull out your contributions if you wish, but not the gains without the aforementioned extra costs.
And, with the 401K and Traditional IRA, you also have a problem on the back-end. Even if you prefer not to, the government has a minimum required distribution clause – fully taxed, of course – beginning at age 70 1/2. If you don’t take it, Uncle Sam will make the withdrawal for you and penalize you on top of taking the taxes due. That, my friends, is complete LACK of control… of YOUR money!
Reason No. 3: Your money gets a guaranteed and steady rate of return, with no chance for loss. The normal basic ROR is 4-5%, plus any dividends paid out. Dividends aren’t guaranteed, but the companies that specialize in these special whole life policies have literally paid out dividends every year going back more than a century. Refer back to previous posts about the importance of steady annual returns versus the volatile nature of traditional investments such as stocks and bonds. Losing money hurts more than gains help. With these policies, you simply don’t lose money, regardless of what the markets do, domestically or internationally.
Still, I must ask… could you invest your money elsewhere and possibly earn a better return? Of course, but consider that the government programs littered with Wall Street mutual funds and other similar products often carry with them high fees as well as no guarantee of any return at all (and thus, no downside protection). Insurance companies have some associated fees as well, true, but those are already factored into the return and dividends – and made known to you up front – rather than subtracted from the end results. And they are typically lower than the fees charged inside a 401K Plan, notes Tony Robbins in his personal finance best-seller of a few years ago, Money: Master The Game.
Reason No. 4: Tax-free access, bay-bee. This advantage is often the most misunderstood, so let me clarify. Any monies you’ve paid in as premiums into a whole life policy, as well as dividends earned, can be withdrawn from the policy free of income tax. Any other funds accrued in the cash value can be accessed through policy loans. Loan proceeds are never taxable.
And although there are those who think the government intends to eliminate that last feature from these products, such talk has purportedly been going on for decades and nothing’s come of it. Plus, if the law did change it would almost certainly affect only future policies not yet written, not current ones already on the books.
Reason No. 5: The policy can include a feature that allows your cash value nest egg to grow even if you borrow from it, as if you didn’t borrow at all. That sounds too sweet to be factual, but it’s completely true and actually pretty straight-forward. Written properly, these policies allow for this huge benefit because the loan proceeds come from the insurance company’s general fund, NOT the actual cash values of the clients. The cash values are just the collateral, thereby allowing them to stay in place and grow as if no loan had been taken against them at all.
So imagine having $25,000 built up in the cash value of your policy and you want a new car. You can borrow the funds from the insurance company (without qualifying – just request it, and the money will be made available to you in a few days), and the $25K will still be accruing the guaranteed ROR plus be part of how your potential dividend is determined.
You are charged interest on the loan, usually about 5%, but with the roughly matching rate of return, the loan is costing you a net of nothing. And, you can choose the terms for paying it back. You can even decide NOT to pay it back if you wish. If the insured individual dies, and there are unpaid loans on the books, the loan balance is simply deducted from the death benefit before it is awarded to the policy’s beneficiary. It should be noted that for most financial planning strategies involving whole life insurance, it is recommended that policy loans be repaid.
With all these valuable advantages – and truthfully, I’ve only touched on the most basic benefits – it’s hard to imagine anyone choosing instead to let the government control his or her funds. But that choice remains out there and selected by a whole host of folks, most of which simply have no idea that the proper kind of life insurance has living benefits rather than just a death benefit and is far superior to traditional approaches to saving and investing.
Continue to consider all your choices, and be savvy… because you CAN Build Wealth Early! Thanks for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.