|Whole Life Insurance
Why wealth managers should take another look.
October 22, 2009
In recent years your client's image of the concept of "Wealth Management" may have been trying to keep the loss of their total portfolio to "only" 35 percent or so. Very ugly times for hardworking Americans who had become used to double-digit returns on their 401Ks and similar increases in the value of their homes.
This is a great time to look at something for your clients that is incredibly dull, that rarely if ever gets the crew at CNBC excited but is a product that has been a key component in creating and maintaining wealth for generations: life insurance and specifically Whole Life insurance. Stop laughing- it's true! Let's look at the facts. Life Insurance can provide a way to protect your client's wealth and family for a specific period of time (think Term life Insurance) or for their whole life.
Whole Life Insurance
Imagine a client who is 45-year-old, in good health with kids and a mortgage. This client has the usual mix of components to their wealth — a 401K, the equity in their house (hopefully some is still there), some cash in the bank. This client can purchase a $1 million Whole Life Insurance policy from one of the top insurance companies in the U.S., John Hancock Life Insurance, a company with a A++ rating from A.M. Best (their highest possible rating for financial stability and claims paying ability) and a company with over $250 billion in assets. (Similar policies can be obtained from other outstanding life insurance companies with A++ rating like Northwestern Mutual, New York Life and Mass Mutual. I picked John Hancock Life for this example because I personally place clients with them and because they were the easiest to get quick answers and information from for this column.) This policy will cost your client approximately $1,006.80 a month for a guaranteed death benefit of $1 million. Another way of looking at this is the $1006.80 generating a guaranteed, TAX-FREE $1 million component of their estate.
This Whole Life policy has no moving parts. It is a contract with guarantees. If your client pays the $1006.80 per month they will have a component of their financial plan guaranteed to generate $1 million tax-free.
It is important to make clear that I am talking about a traditional Whole Life Insurance policy. I am not talking about one of the newer life insurance variants that were developed in recent decades by insurance companies to try to compete with the high — but not guaranteed — returns on mutual funds and other true investment products. These more exciting products worked fine for many people but did not work fine for others and tarnished the reputation of life insurance for some advisors and investors. The Whole Life insurance policy I am talking about is a contract with guarantees.
Think of the most recent mutual fund ad your client saw on CNBC or in Money magazine extolling the fund's "top of class" returns. The ad always ends with the legal stuff "of course, past performance is no guarantee of future results." With Whole Life you get guarantees.
Whole Life also contains a saving component called a "total cash surrender value." This cash value provides a guaranteed five percent return and can provide tax-free money while alive. Yes, your client can get benefit from their Whole Life while your client is still alive. After year three, the policy starts generating some of this "cash value" meaning the premium paid can cover the insurance companies cost for the death benefit, administrative costs and profit and have money left over.
The "cash value" in a client's Whole Life Insurance policy can be accessed tax-free in many ways and for many different purposes. The cash value can be accessed by taking out money via a loan against the cash value. Your client can arrange to have the cash value paid out in a regular monthly or annual income stream. Money taken out of the cash value would reduce the death benefit. Say at age 66, your client were to take out their guaranteed $310,690 and pay the college tuition of one kid, the wedding costs of another kid and make a donation to endow a scholarship at their alma mater and then get hit by lightning the next day and die then their $1 million death benefit would be paid out minus the $310,690 in cash value that had been withdrawn. Typically, once the cash value has grown to a certain point, it can be used to pay the premium on the policy.
To make things more interesting I have added to this sample Whole Life a neat twist — it has a LTC component so it in effect offers two benefits for one premium. This sample policy would provide up to 50 months of benefits to reimburse Long Term Care costs at up to $20,000 per month for care in your client's home, an Assisted Living Facility or Nursing Home. This is a great feature for those advisors who understand the profound financial and personal risks that LTC and its costs pose to their clients but have a client, usually always a man, who objects to a stand alone LTC insurance policy because "what if I drop dead and never use it." Whole Life policy with a LTC rider will ultimately be used and your client will get their money's worth. Any LTC benefits paid out would naturally reduce the death benefit.
Whole Life policies from major carriers will typically include a feature called an "accelerated death benefit" that allows the insured to access a certain percentage of the death benefit when they have been diagnosed with having less than 12 months to live. This money — accelerated death benefit — can be used for any reason, such as pay living expenses, family vacations or experimental healthcare treatments that the insured's health insurance may not cover.
Lack of Whole Life Insurance Awareness
I think there are two other key components to the lack of awareness of the virtues of Whole Life insurance. The first is the heavy level of regulation on insurance companies by the 50 state insurance regulators. These consumer watchdogs and their state legislatures, seriously restrict the marketing and claims insurance companies can make especially when compared to firms in the investment sectors. The other component to whole life's lack of visibility is very fact that insurance companies have historically been staffed by very conservative people and for very good reasons.
When developing your plans to help manage your clients wealth (and your own!), take a look at Whole Life insurance from a top rated carrier. Your clients will thank you for the wise advice!
Rate this article 5 (excellent) to 1 (poor). Send your responses here.
Don Grimes is the founder of Long Term Care Education Specialists. In 2002, Grimes was selected to serve as one of 16 presenters nationwide to conduct the educational presentations for the Federal Long-Term Care Insurance Program (FLTCIP). Some of the federal agencies he presented at included NASA, General Services Administration (GSA), IRS, EPA and U.S. Postal Service among others.