Is Whole Life Insurance an Investment?
As a former life insurance agent, I was trained to sell some forms of life insurance as an investment. Whole Life and Universal Life (with some derivatives) were the two forms most popular for selling as an investment. By the way, the commission dollars are really great for these products too. Term insurance isn’t highly commissioned because it’s easier to sell.
We spent a lot of time in sales training class overcoming objections to the premise that life insurance can be an investment.
- Cash Value doesn’t go down when the stock market goes down
- Cash Value doesn’t go down when bond interest rates go up and bond fund balances go down
- Cash Value is safe because the insurance company stands behind it
- You can borrow against Cash Value (and pay interest to the insurance company)
- You can even overfund the policy and call it a pension plan (be careful to say “like a pension”)
- You can do a 1035 tax deferred exchange into an annuity and gain an income stream
- If you don’t make it to your end game, your beneficiary will be compensated
- If you “buy term and invest the difference” you can lose money
I think that’s enough of the sales pitches I remember from training in 1994. Did I tell you I was the state new agent of the year for that year? I sold a big whole life policy. Trip to NYC staying at the Waldorf with dinners and shows were part of the reward.
Now before you get all excited about my selling whole life as an investment, it was actually to shelter a big payout to an ex-spouse. I was lucky to be at the right place at the right time.
Whole life is a bond market and commercial real estate market play by the insurance company. Dividends accrue on your premiums not needed to fund the inside deduction for a mortality charge. The younger you buy a whole life policy the better the cash value will grow because the mortality charges are much smaller at younger ages. Oh, and my commissions keep being paid as long as you continue to make those payments.
Universal life expands the kind of investments inside the policy and adds interest rate risk and more reward that was borne by the insurance company in the whole life product. You can even invest in the stock market in the Variable Universal Life product among funds that are not mutual funds, but sure look like them.
We provided sales material to our prospects that we called “illustrations”. They sure looked good in the year around retirement time too, full of cash for many uses.
So, what is my point? All sorts of insurance products can be “investments”. The primary function of “permanent” life insurance, designed to last a lifetime, and called whole life or universal life or variable universal life, in my examples, is to provide a death benefit, income tax free, in case of premature death, or fund terminal illness costs, or even borrow for retirement needs.
Can you do better, buying term and investing the difference? Yes and no. Just remember folks like me are trained to point out how much value you can receive by using life insurance as an investment. If you’re very conservative, afraid of the stock market, susceptible to fear in sales pitches, then go ahead and take the permanent life insurance plunge.
On the other hand, you might be better off becoming a more informed consumer and investor. It’s not a simple choice. Be assured there are lots of blogs and books to help you reach your investment goals. A financial advisor who is also a fiduciary might be conflict disclosed or even conflict-free alternative to explore this topic.
Jim Ludwick is the founder of MainStreet Financial Planning, Inc., a fiduciary financial planning firm.