Whole Life Insurance Is (By Definition) Not An Investment

Great Article by Jeffrey Reeves (author of  the book Money for Life)

A whole life (WL) insurance policy bears some of the characteristics of an investment. However, at its core, it is a contract and is not an investment. Because an insurance policy is a contract, it makes promises that no investment can…

Promises and Guarantees NOT Available With ANY Investment…

o A WL policy provides specific, predictable, and guaranteed annual increases in its cash value account;
o WL insurance lets you grow your wealth tax free year after year…no sliding backward…no worries about stock market crashes or real estate market bubbles…just peace of mind about your money
o A whole life insurance policy can fund an inflation-protected income that you do not have to work for and you can’t outlive
o A whole life insurance policy offers protection from creditors and legal claims [check with your local attorney as laws vary among states]
o You can use the money in your whole life insurance policy when one of life’s surprisingly unsurprising surprises throws you off track
o Your whole life insurance policy serves you without compromise while you are alive and allows you to pay forward – tax free and to anyone you choose – your legacy of wealth and wisdom
o You have unqualified access to the cash value in a whole life policy [no approval needed] The government, your employer, or any other outsiders have nothing to say about how you use the money in your whole life insurance policy
o Oh yes, did we mention that

o the growth of cash values is tax-free
o the income you derive may be tax-free if properly managed,
o the death benefits paid to beneficiaries are tax-free.

In addition, a participating WL contract from a mutual insurance company may also pay dividends. A dividend paid to a participating insurance contract by an insurance company is considered a tax-free return of unused premium and, when properly managed, becomes part of the basic policy once it has been paid. That means the growth of cash values attributed to dividends is also tax-free.

When you take into account these and many other benefits that can be derived from owning whole life insurance, it might look better than much of what we call investments today.

The Rate of Return Myth

Why? When an advisor [or your neighbor, or the guy at the gym] refers to a “good” investment, they usually speak primarily about the “rate of return.” However, to paraphrase Benjamin Graham, the Dean of Wall Street and Warren Buffet’s mentor, an investment has two essential qualities: safety of principal and a reasonable rate of return.

Life insurance provides both, so in that sense you might consider it an investment. However, since whole life insurance serves so many other purposes both by contract and de-facto, it falls outside the definition of an investment and remains a unique financial vehicle.

Much of what is presented to the public today as an investment is really a speculation. The issue of safety of principal is in question on everything from high profile stocks [Enron, MCI, GM, AIG, Lehman Brothers, etc.] to mutual funds, ETFs, and so on.

What usually makes these speculations seem attractive – and what the sellers of them focus your attention on – is the promised rate of return based on averages of past performance, even though they disclaim that past performance is in any way predictive of future performance.

Ask any well-informed investment economist for a prediction of future returns and you’ll discover that four to six percent, net of taxes, commissions, term insurance costs and fees, in a good market is reasonable for the typical mutual fund, 401(k), and ETF types of investing. Facing a long-term bear market as we are today, you can and should expect less.

A whole life insurance contract guarantees the growth of its cash value and offers the possibility of tax-free dividends as well. Over the long-term, a WL nets out about in the middle of the four to six percent range based on its past performance, which is predictive but is not guaranteed. From that perspective, whole life might be thought of as a “good” investment according to Benjamin Graham’s definition.

Not An Investment…Thank God…

Having said all that, whole life insurance policies are still not investments. They offer options and benefits that are simply not available in any other financial product, and that is perhaps what recommends them most as an essential part of every American’s financial foundation. One financial writer recently called WL the Swiss Army Knife of financial products.

Perhaps it’s time for America to re-awaken the principles and values that made us great in the first place and to elevate savings and legacy to a place of respect. If we do that, we will all be seeking out agents and advisors who can sell us one or more whole life insurance policies.