Whole life insurance: An opportunity in a changing market

By Stefan Greenberg

Geopolitical instability - including rising tension between the U.S. and China, the war in Ukraine, inflation, rising interest rates, bank failures and volatile stock markets - are factors contributing to a challenging environment that many investors did not anticipate. The question that we’re hearing many investors ask is whether there might be a way to protect their assets from economic forces that threaten to erode them. Typically not top of mind, but often a savvy option, whole life insurance should be considered.

Whole life insurance can serve as part of the foundation of a financial plan and a solid component of a client’s overall financial strategy. Clients generally understand that their portfolios should be diversified and whole life insurance can be a part of that diversification strategy. The COVID-19 pandemic spurred individuals and families to scrutinize their financial investments. For many investors, the pandemic also made them consider why it’s important to have more life insurance coverage for themselves and their loved ones.

A strategy that includes whole life insurance is key for investors who plan to leave money to the next generation. But it is important to note that whole life insurance is not a short-term investment. Whole life insurance is illiquid and holds a zero rate of return in the first 10 years. Ideally, this should be looked at as a 20- to 30-year or longer investment.

Ensuring the future financial health of loved ones is one of several benefits related to this type of insurance.

Often the first item that comes to mind, whole life insurance policies offer a death benefit which is guaranteed and tax-free to beneficiaries. Additionally, a portion of the premiums paid for a policy that goes toward the mortality/cost of insurance is guaranteed never to increase, which is not the case for other permanent insurance products. Much of the remainder is allowed to accumulate as cash value and increases the death benefit over the life of the policy. This allows clients to spend or liquidate other assets while the whole life insurance acts as a security blanket.

Whole life contracts also offer annual dividends that are based on the profitability of the issuing insurance company. A portion of that annual dividend is guaranteed each year. Dividends are influenced by prevailing interest rates, so even in an environment where rising rates have depressed returns and generated losses for many investors in equities and bonds, they will also contribute to higher dividends in many whole life policies (insurance company dependent). Those higher portfolio returns are passed on as dividends to whole life policyholders.

Moreover, policy values grow tax-free and can be withdrawn at any point in time based on tax-free based loans on your current death benefit. Cash value can be used for cash flow needs that impact many families - for example, as an emergency fund in the event of loss of employment or unexpected expenses, a down payment on a home, college education costs, and potentially other retirement cash flow needs that arise in a down market or high-income tax environment.

A carefully selected whole life policy typically provides clients with both insurance protection and guaranteed income that in today’s environment may well exceed the income available from money market funds, bank certificates of deposit, U.S. Treasury securities and even some corporate bond funds. The key term, of course, is “carefully selected.” Not all policies are the same and clients should be advised and carefully consider what constitutes the right amount of life insurance coverage for their needs. Clients should also consider balancing whole life insurance with other products such as term insurance, as appropriate. Advisors should work closely with clients to identify the type of policy that offers the relevant combination of benefits and cost for each client’s specific needs.

Whole life insurance products hold benefits that address certain financial needs, but they are not a one size fits all solution. Clients may want to consider looking at this as a long-term vehicle and an investment into the future. As the famous proverb goes, the best time to plant a tree is 20 years ago and the second-best time is now. By mapping out a financial plan from the beginning, advisors can help clients navigate challenging economic environments and counsel them regarding the proper financial products that will continue to meet their needs and the needs of their family for years to come.

Stefan Greenberg, CFP, CFS, CLTC, is managing partner and relationship manager with Lenox Advisors. He may be contacted at [email protected].