Life Insurance (The Value of Whole)

Today I’m going to cover a topic that isn’t the sexiest financial product, but one of the most valuable and necessary pieces to a comprehensive plan, Whole Life Insurance. I like to use a sports analogy, as I played baseball my whole life and hold it near to my heart. In baseball you have offense, defense and pitching. Offense is what everyone loves to watch and is arguably the most entertaining. Defense and pitching get less attention, but as a former college pitcher I can attest to the fact that they are what wins championships. With that being said, one can think of Stocks and other securities as offense and the defense and pitching is Whole Life Insurance.

The second most important difference to comprehend when considering what type of insurance to purchase is whether you want to be covered temporarily, or permanently. For our sakes I will give a brief definition of term insurance but I am going to focus on the more valuable product, Whole Life. Whole life insurance is a type of life insurance that is intended to cover you for life. The premiums are usually fixed, and will be lower the younger you are when you purchase it. On the flip side, term insurance covers you for a set period of time (temporary). Although it’s initially cheaper, it has no cash value. While premiums for these level term policies remain level for a set number of years, after this time period the premium increases significantly, making the policy cost prohibitive. Term Insurance is good for those who need to pay down debt, because it can be converted to whole life later on. However, if you’re looking for a tax free retirement planning vehicle I suggest Whole life.

The first key advantage of whole life insurance is that the cost of the premiums paid to the policy never increases, as long as you make sure to pay the premiums and the policy doesn’t lapse. This is important because with term, your rates are ever increasing due to aging and changes in health. With whole life insurance, the premium cost stays the same as long as the policy is in force. Even if you become gravely ill, the cost never changes. If you look at it from a Cost Of Living perspective it actually gets cheaper, because the premium remains the same while yearly inflation erodes the value of money. By having a premium that never changes, you are essentially paying for the policy with “cheaper dollars.”

In a whole life policy, the premiums paid go towards accruing cash value. This investment component earns interest annually, and reaps the benefits of compounding interest in the policy’s later years. When one invests in a 401k or traditional IRA they are only deferring taxes until retirement. With a whole life insurance policy, you pay the premiums with after-tax dollars. The cash value grows without taxation. Another huge benefit of Whole life is the dividends associated with the policy. The key thing here, again, is that these dividends aren’t taxed, but are considered returns of premium. So, if at the end of the year the insurance company pays out $3,000 in dividends on your policy, you don’t pay taxes on that money. You can take that money in the form of a check, reinvest it in the cash value of the policy, or use the dollars to purchase additional, paid-up insurance. Those dollars will buy more life insurance, provide a bigger death benefit, and earn interest. The final subject I will discuss here is the ability to Borrow against your policy.

With Whole life, the owner can borrow against the cash value in the policy and pay themselves back as if they were their own personal bank. For example, if you ever find that you are in need of cash, perhaps to help pay for a child’s education, you can borrow money from the cash value of the policy. Also, there’s the potential for tax-free income. By borrowing against the policy, you can take money out of the policy tax-free. Though you will pay interest on the loan, depending on your income tax bracket, it can be substantially lower than what you’d pay in taxes. This also allows individuals younger than 59 1/2 to access income for an early retirement without having to pay hefty taxes and penalties. Finally, and appealing to the wealthy, is the fact that in most states Whole life policies are exempt from creditors. Meaning if one is sued that money is viewed as protected because it is intended to benefit someone else: the beneficiary.

Mike Galvin

Southern Capital Growth

Cell: (774) 277-1407


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