Life Insurance Blog

The advantage of whole life insurance
March 12th, 2009
in whole life insurance

Regular vanilla whole life insurance has taken a beating from some in the media that profess that it is too expensive and that you should always buy term.   I agree that term is often the best solution for some clients at that given point in time, but having whole life can be powerful vehicle.  Many times to meet large insurance needs  our clients will buy a majority of term and buy a smaller portion of permanent insurance.   This may be the only affordable way for the time being to meet that large insurance need.

Term life insurance is like renting and the premiums are usually much less expensive than whole life at first.  What happens at the end of the level term is the premiums skyrocket through the roof and most people drop the policy at that point.  The advantage to whole life insurance is that you lock into a premium amount and it stays level forever.  When the level term ends and the premium is skyrocketing, the whole life keeps plugging along at the same level.  If you select a good mutual life insurance company that consistently pays a good dividend, then you will also have built significant cash values.   The cash values grow tax deferred and can be used to help finance things during your lifetime while you continue to have permanent insurance.   For example, you want to buy a business at age 42 and you have accumulated a cash value of $56,000.  The business is going to require an initial investment of $37,500.    You pull the 37.5 out of the whole life and the insurance company charges a loan interest rate.  Let’s say it is 6% they charge and you pay the loan back at 10% interest.  Not only are you paying yourself back, but you are making a 4% spread on the money creating a turbo charge effect on your policy.  Four years later, after paying the amortization schedule for the business, you borrow money from yourself again to buy a new car.  Of course you pay yourself back once more.

The whole life cash value is guaranteed to get better no matter what.  There are not many financial vehicles that you can say that for.

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