Permanent Whole Life Insurance

I own a particular asset class that I don’t think is very popular when compared to how many people own let’s say stocks, mutual funds, bonds, cash equivalents, etc., and that is my permanent whole life insurance.

Term insurance is easy to understand, you pay $X and if you die before the term ends your beneficiaries will receive the death benefit. Whole life works a little bit different. As defined by Investopedia,

Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level, regularly due premium payments. The policy includes a savings portion, called the “cash value,” alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance.

To build cash value, a policyholder can remit payments more than the scheduled premium. Additionally, dividends can be reinvested into the cash value and earn interest. The cash value offers a living benefit to the policyholder. In essence, it serves as a source of equity. To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer. Also, the owner may withdraw funds tax free up to the value of total premiums paid. Loans that are unpaid will reduce the death benefit by the outstanding amount. Withdrawals reduce the cash value but not the death benefit.

So, at the same time there is a death benefit and cash value building. I do not get to keep both but until the contract endows death benefit should be higher. When dividends are paid they buy little paid up policies which then, themselves, receive a dividend which buy another tiny little policy (generally referred to as Paid Up Additions and they are very similar to a reinvesting dividends).

I consider whole life insurance as an asset because at some point, as long as I do not lapse the policy, someone in my life will receive the benefit. Either I will use the cash surrender value or when I die my children will receive the death benefit.

Most opponents of whole life insurance have a problem with the returns on the policy. The so-called experts will say, buy-term and invest the difference…which most people just simply won’t do. Most Americans barely have enough savings to cover a minor emergency, but this is the time they/we don’t need forced savings? In my opinion that type of thinking is analogous to telling everyone that they should use an interest only home note and invest the difference. Hell, I think I do save a good amount of money and I am positive I wouldn’t have the below amount sitting somewhere else.

The cash value will often, if not always, trail market returns. However, when looking at a whole life policy, it shouldn’t be replacing your equity or business holdings, and there are a few less than reputable life insurance agents that will disagree with me on that point. Having run thousands upon thousands of illustrations over the course of my career over the long term (10 to 30 years) it is like building a tax deferred, likely tax free, bond fund.

My Whole Life Insurance Policies

I own a total of eight policies on different family members’ life. Specifically, I own policies from two mutual companies, Guardian & MassMutual. A mutual company is one that is owned by the policy holders rather than stock holders. The idea is that the company is more likely to operate in the best interest of the owner-policy holders rather than the owner-stockholders.

The below policies are not the only insurance on my life or The Wife’s life as it would leave us woefully underinsured, but since a term policy is purely an expense at this point (since I am living) it doesn’t have to be highlighted on this site.

Policies on The Wife and Myself

Both of us have whole life insurance on our lives (balance as of 10/2020):

Policies on My Children

Against The Wife’s wishes I bought policies on both my children. I did this for a few reasons:

1. If something were to happen to my children I am not going to work. I am not sure for how long, but I certainly don’t have enough to never work again, but I do have enough to take some time off to figure out what the hell to do.
2. Both policies below have Guaranteed Insurability Riders. If my children were unhealthy or uninsurable they would both get the opportunity to increase their coverage without underwriting.
3. If nothing catastrophic happens, I can always gift them the policies or just cash them in. Would the rate of return be as high as investing in the market, probably not, but see items 1 and 2.

My Whole Life Insurance Asset Class

I currently have approximately $35,065 in accessible cash surrender value. Recently, The Wife and I have been considering leveraging this amount to build a pool, however, I don’t think I am going to need to do that since the funds are going to come from elsewhere. For the time being, this asset class is going to just sit and grow with forced savings that happens monthly.