Whole Life Insurance Strategies

While entertaining illustrations regarding permanent life insurance policies, please be aware of the rate of return being assumed. It is imperative to make sure it is a reasonable percentage.

Eric EstevezLicensed Independent Insurance Broker and Owner of HLC Insurance Broker, LLC

Eric Estevez is an independently licensed life insurance agent who serves as a financial professional for a multinational corporation. Upon graduating from William Paterson University with a bachelor’s degree in accounting, Eric kickstarted his career as a financial institution auditor. His first day on the job was Sept. 15, 2008…

Before diving into the strategic advantages, it’s important to understand what a permanent life insurance policy is and how whole life insurance plays into it.

Unlike term life insurance, permanent life insurance is active for the duration of the policyholder’s life, and it consists of two components funded by the policy’s premium payments: a death benefit and a cash value reserve.

Whole life insurance is a type of permanent policy that consists of scheduled, consistent premiums and a fixed death benefit. It guarantees a fixed rate of interest established by the issuing insurer.

This article is focused on whole life insurance and how it can be used to enhance your overall financial plan. Before determining whether a whole life insurance policy is right for you, it’s important to understand the benefits achievable by this type of policy, as well as the drawbacks.

Providing a Death Benefit

A foundational aspect of a whole life policy is the payout it provides to its named beneficiaries in the event of the policyholder’s death. This gives many policyholders immense peace of mind, assuring them their loved ones will be taken care of when they are gone.

You can name as many beneficiaries as you like, and you can allocate your policy’s death benefit payout in whatever proportions you deem appropriate. For instance, you could elect for a single individual to receive 100% of your policy’s death benefit, or you could elect four individuals to each receive 25% of the payout.

Incidentally, the cash value component of a permanent life policy normally cannot be passed onto your beneficiaries. It is distinct from the death benefit, but the two components are connected. For example, if you permanently withdraw money from the cash value (for any reason other than paying your premiums), the death benefit is likely to be reduced.

Generating Income for Retirement

In addition to providing a death benefit, a whole life insurance policy can be a great way for high-net-worth individuals to invest in a tax-advantaged manner. A whole life policy can be a particularly wise avenue for individuals that have maxed out contributions to other tax-advantaged vehicles, such as 401(k) plans and individual retirement accounts (IRAs).

The yield on a whole life policy is relatively low, but so is the risk. Assuming you have taken appropriate risks in other aspects of your investment plan, a whole life insurance portfolio could be an ideal place for excess funds.

Once you’ve accumulated an ample cash value reserve, you can take out loans against your policy to meet your spending needs. These aren’t loans in the traditional sense because the funds belong to you. They are more aptly characterized as draws that usually inversely impact the value of your death benefit. Essentially, any unreplenished draws will reduce the death benefit payout to your beneficiaries.

Saving for College

Purchasing a whole life policy can also make a lot of sense when saving for a medium-term outlay, such as college tuition for a child nearing their teenage years. In this scenario, your runway isn’t long enough to assume the downside risks associated with investing in stocks and interest-rate sensitive bonds, but it is long enough to strive for a higher rate of return than what’s achievable through a high yield savings account.

A whole life policy will enable you to safely grow your money on a tax-deferred basis, which can greatly amplify your savings potential over time. Just remember, when you withdraw funds from the policy’s cash value reserve to pay the tuition, the death benefit component of the policy is likely to be reduced.

Riders for Whole Life Insurance

Many whole life policies allow you to customize the terms of the policy to provide benefits that extend beyond those described above. These benefits, which are referred to as riders, can be costly. Nevertheless, depending on your situation, they can be very valuable.

A handful of commonly purchased riders are described below.

Common Riders for Whole Life Insurance

Enhanced Death Benefit

As noted previously, most whole life policies do not pass on accumulated cash value to a policyholder’s heirs. Only the death benefit component is paid out to beneficiaries, and the cash value component reverts to the issuing insurance company. That said, some policies allow you to purchase an enhanced death benefit rider that gives your beneficiaries both the death benefit and the accumulated cash value.

Accidental Death Benefit

If you die from a covered accident, such as a car accident or drowning, then an accidental death rider increases the payout to a policy’s beneficiaries. It is sometimes referred to as a double indemnity rider because it often doubles the amount of money your beneficiaries receive. After you reach a certain age, payouts from an accidental death rider may be reduced.

Term Insurance Add-On

A term insurance rider can be added to a whole life policy for additional coverage for a specified length of time. Essentially, it provides your beneficiaries with a higher death benefit, but it only remains in force for a set number of years.

Waiver of Cost of Insurance

A waiver of cost of insurance rider pays your life insurance premiums in the event you become totally disabled and cannot work. With this feature, your premiums will be covered until you are no longer disabled or reach a certain age, typically between 65 and 70. Generally, there is a waiting period for this rider to pay out. However, if your claim is approved, you will be reimbursed for the premiums paid during the waiting period.

Is Whole Life Insurance Right For You?

All things considered, whole life insurance is sensible for individuals looking to provide financial security to their loved ones while investing in a tax-advantaged and low-risk manner. It is best suited for relatively high-income individuals seeking to shelter their income from high tax rates.

It’s not a great solution for lower income investors. These individuals face too much opportunity cost by investing in relatively low-yielding whole life products. They can achieve much stronger returns by investing in publicly traded stocks, bonds, alternative investments and annuities. That said, an investment plan is highly personal and should always be customized to meet your unique objectives and tolerance for risk.