Whole life insurance is a very powerful financial tool and a very reliable one as well.
Insurance is designed to take risk off of you and put it onto the insurer, in exchange for reasonable compensation. If they are taking hundreds of thousands or risk on you, they want to get paid a little bit for it. Unfortunately, they aren’t just doing it out of the bottom of their hearts.
Thankfully, if you choose your insurer wisely, you can ensure that their interests align closely with your interests.
What are some of the reasons that I would compare Whole Life to a Swiss Army Knife? Here are some:
- You can borrow against it inside the policy. You get paid dividends even on the amounts as collateral for the loan. You set the repayment schedule or potentially just never pay it back.
- You can borrow against it outside the policy. Banks are willing to use it as collateral for secured loans, which can result in quite low interest rates.
- A good blended whole life policy will have a great deal of the death benefit coming from term insurance, providing a high death benefit per dollar spent on coverage. The minimum term per unit of whole life is usually 2x and it can go to 19x and beyond.
- There are a lot of good options to keep a policy in force after the first few years, even if you have trouble paying the yearly premiums for whatever reason.
- Unless you design the policy poorly or you quit paying, the cash value never goes down.
- It has a pretty good yield for an asset whose cash value never goes down.
- You can withdraw money from it equal to the amount you put in tax free. You will have less cash value earning a solid yield this way, but in your retirement years it certainly helps to be able to take out money tax free, especially when the yearly gains on your cash value are quite high.
- It doesn’t count against you in most calculations. Your kid doesn’t get less student aid when you have it, unlike most other types of assets. Usually, life insurance cash value is protected in case you get sued and other stuff.
- You can usually get a loan in low single digits number of days. If there is an investment opportunity where you can easily double your money, but you need to have access to a lot of quick cash, you can do that.
- For tax purposes, dividends from life insurance are considered returns of excess premiums paid. That means you are getting money back as if you had paid too much for insurance. How this can be reconciled with the concept that you can easily get back more in dividends in a later year than the entire amount you contributed to the policy for all the years put together, I don’t know. I don’t need to know, though. That’s just how it is.
- People actually do need insurance in retirement. Something like 40% of all death benefit is written on people that are in retirement already. That means retired people are buying a lot of insurance.
- It’s insurance, so you avoid a lot of risks, like sequence of returns risk or bad decision making risk, either of which can devastate a portfolio.
- It’s forced savings, your net worth will go up considerably when you have it just by definition as long as you aren’t being wasteful and assuming unwise amounts of debt.
- It’s a great companion to more risky investments like stocks.
- Your cash value is invested in the way that generates the highest risk adjusted returns. That’s what insurers do with it.
- There are some built in benefits for free, like being able to use some of your death benefit while you are alive for some types of medical expenses.
- When you depart, the world won’t just be sad and that’s it. They will likely have a few hundred thousand reasons to be feeling OK too.
- Out of the premium payments, a lot of it should be optional. That means it works with your situation both in your better months/years and your worse months/years.