A properly structured permanent insurance policy has a lot of benefits.
By properly structured, I mean that it has:
- A small amount of whole life insurance
- The maximum amount of term insurance attachable to the whole life
- The ability to pay extra to add Paid Up Additions
- You get a good interest rate on your cash value
- The death benefit should go up every year
A policy setup this way has a whole lot of benefits, including:
Any cash value that you get into your policy is guaranteed to go up at a solid rate. Even if the stock market goes down 20%, your cash value will still go up by a minimum of 4%. Where else can you put money that you can get a minimum of 4% without fail and most likely quite a bit higher than 4%?
If you cash it in, which I would not suggest, you get back the cash value guaranteed.
Consistently, the number one thing that people say they want from places they put their money is being able to get back everything they put in. There are very few places that guarantee that you will get all your money back and none of them have the same minimum and average growth rates that life insurance cash value has.
- Low base premiums
The worst thing that can happen to a permanent insurance policy is that it lapses before benefits are paid out. Making the base premiums required to keep the insurance going low maximally prevents this from happening. The interest on your cash value will help pay this too.
- High and cheap death benefit
Term insurance is really cheap for the cost and this policy will have a ton of it. If you die too soon, your beneficiaries will receive a great deal of income to help them get through the struggle that follows. The Paid Up Additions causes this number to go up every year.
- Paid Up Additions are cost effective
These will probably come with a front end load of 5%. After that, there are no fees attached. This is a really cheap way to build cash value (what you are getting interest on) very quickly. These are usually beyond paying for themselves in year 2.
On a side note, I personally wish that I could buy these and nothing but these all the way. I only say to buy the whole life and the term part of all this because you have to do that in order to get these. These things are really the best things ever.
It doesn’t take long before these things can pay for your whole policy premiums and pay to keep growing it completely on their own without you doing anything else, if you buy a lot of them early on.
- Tax advantages
Money you take out of this is tax free up to the amount you paid in. You buy this with after tax dollars and you can borrow against it or withdraw from it equal to the money you paid in both tax free. If you die too soon, your beneficiary gets a big check income tax free. Most likely also estate tax free.
- You can get all the benefits at arguably no cost
You put your money in and let it grow for a while and at some point it will start paying for itself plus some. Beyond that point, you can start withdrawing the money you paid in until you have taken out everything you put in.
It will grow much more slowly this way, but you can sooner or later bleed out everything you have paid in and have it still paying the beneficiary a fat check upon your death and have it still pay for itself indefinitely.
How good is it when you have all the benefits and you can show that you have already taken out every dime you put in? It may take quite a few years to get to this point, but you definitely will get there if you stick with it.
- The minimum payoff is high
If you are measuring your life by how good people have it after you are gone, there isn’t much better that you can do than have a permanent, high, and continually growing death benefit. There is no way to get a higher minimum payout on your money than by using insurance.
Maybe you could have had more in the long long long run by buying stocks, but the minimum payoff on stocks is very low. There is no way to buy bonds or stocks with $100 and die the next day and leave many hundreds of thousands behind.
- Guaranteed liquidity
You can call up your insurer and ask them to send you a check equal to 90 or 95% of your cash value as a loan and it will most likely be at your door in a few days. They will do it no questions asked, too. That money gets paid back on your schedule too, if at all.
You could do a similar thing with a 401k or home equity or similar, but they will take longer and they will ask you more invasive questions and they will require you to pay back the loan on a schedule. You don’t have any of those problems with a permanent insurance policy loan.
You should still try to pay the money back on your own schedule, so that you will be getting the most growth possible again, but you don’t have to do it if you don’t want to unless you borrow so much as to put your policy in danger of being cancelled.
If you lose your job or something, it’s really helpful to have life insurance with a high cash value to help get you through that. The longer the policy goes, the more guaranteed liquidity you have.
- Excellent dividend reinvestment rates
Dividends can always be reinvested at a high rate. When reinvesting stock dividends or bond income, you aren’t guaranteed to get a high rate of return on that reinvestment. If the stock or bond prices go up, this will push down the returns you get on re-invested capital. With permanent insurance the growth in cash value always gets reinvested at a minimum of 4% per year. Most likely it will be higher.
Being able to always re-invest at a high minimum rate of return is huge over long time periods.
- You can do arbitrage
Arbitrage is when you borrow at a low rate and invest at a higher rate. Since the insurer themselves will loan you money based on your cash value and so will banks and other institutions and these loans count as secured debt, which gets the lowest interest rates.
That opens up a lot of potential to be able to borrow money and reinvest it at a higher rate and have it still earn interest from the insurer at the same rate as before. The interest above the costs to you can pay off the loan.
- You can hide the money
Depending on your state, life insurance cash value often can’t be taken by creditors or in the case of lawsuits. It will most likely also not count against your children if they are trying to get any kinds of needs based benefits like education grants.
Stuff like 529 accounts counts against your kids and can prevent them from getting free money for college and things like that. Life insurance cash values are usually not counted in these calculations.
- It can fund a lot of your retirement
If you have enough money in cash value by the time you retire, the yearly growth in your cash value will be quite high. You can take some of that back out, tax free to the amount you put in, and use that for retirement expenses. If you are taking less than the amount you gain per year, the yearly income will keep growing even as you do this.
This works similar to an annuity, except that your beneficiary gets a huge death benefit when you die rather than no death benefit.
- Long term care benefits
Many insurance contracts come with an ability to sacrifice some portion of the value to get yourself money for long term care expenses before you die. This can go a long way towards making sure you aren’t a burden to your beneficiaries in your final days.
- Timing risk is minimized
Timing risk is when there is a bear market right before you want to retire. Having stocks go down by 20 or more percent right before your retirement will hugely damage your lifestyle in retirement if you are relying on stocks to fund your retirement.
When using growth in life insurance cash value to fund some or all of your retirement, bear markets can’t hurt your lifestyle nearly as much. This is huge.
- You can avoid outliving your money in retirement
If you are taking equal or less income than your yearly gains in cash value, the money flow will never stop. When taking money from stocks, your money flow will most likely stop eventually. People are very often outliving their retirements these days, and that can be completely prevented.
- Comissions are minimized
A lot of people are wary of paying high fees. When building your insurance policy this way, the expenses for the policy are minimized. You should definitely be thinking about what you get in return more than what your fees are, but in general you pay low fees like this.
Most places you put your money, the results are highly inconsistent. In any given year, you may gain a lot or you may lose a lot. There isn’t anything more consistent than growth in life insurance cash values.
This is another thing that is huge. You don’t want randomly bad results that happen at any point to cripple you long term. You only get one shot. When it’s time to retire, you can’t rewind and choose how to allocate your money all over again. You can take the randomness out of the equation with life insurance cash value.
- It’s easy to sleep at night
You never have to worry about all your money being gone. With stocks, that can be a real fear. There are very very few things that can take away your life insurance cash value. Even if your chosen insurer goes out of business, something that virtually never happens, other insurers almost always pick up the failed insurer’s policies more or less from where they left off.
Insurers need average people to believe in the insurance system. If people don’t believe insurance will pay, they will quit buying insurance. Insurers have a vested interest in ensuring policies pay, even policies written by failed insurers. It’s worth it if they take a loss in order to keep people believing in the system.
- Permanent insurance dividend returns are meaningful numbers
With life insurance cash values, if you are getting 5% per year then you can easily calculate where you are going to be a few years later. If you have 1000 in cash value and you gain 5% for two years you end up at 1102.50.
With stocks, a 5% per year average growth rate can mean one year losing 50% and the next year gaining 60%. If you have 1000 in stocks and those returns happen, you end up with 800. This sort of problem happens a lot with stocks. This sort of problem makes a big difference in compound annual growth rate, the most important statistic that you want to be tracking.
It really sucks when your investment shows 5% per year gains and your compound annual growth rate is negative 9.1%. This effect right here is the reason that nobody investing in stocks ever ends up with the average yearly growth rate being applied to their account values, at least not in the way that they think it should.