Lifetime Guaranteed Cash Value is an often overlooked and very powerful aspect of the use of whole life insurance as a wealth-creating tool. The fact that a financial intermediary is willing to guarantee a value that you can walk away from them with while promising to pay a significantly larger amount to your beneficiary if you die is both a difficult task to perform and an unworthy benefit achieved with others financial tools.
When we talk about the whole life insurance, we are most interested in the dividend. We care so much about dividends because they are an important driving force behind the overall potential for building wealth that the entire life insurance provides. But insurance is really an option that is often maintained when we think about what can go wrong when we wade through life. Certainly I can not name any other financial tool that offers guarantees anywhere close to what all of life has to offer, especially given its non-guaranteed potential.
Attacking Whole Life Insurance Guaranteed Cash Value
Despite the lifelong strengths of guaranteed cash value, many people attack the Guaranteed Book for an entire life insurance illustration because they obviously know of something you can probably do better. Doing better is a very subjective and relative view, but one of the main arguments put forward states that with full life insurance, you are guaranteed to lose money if you buy them.
Seems like a reasonable claim. I mean, the book generally reflects a figure less than the premium you pay in the first year. It can look like this:
In this case, the premium paid out annually is $ 25,000. can clearly see that for this 40-year-old man he is guaranteed to lose $ 5,556 (we simply subtract the guaranteed cash value from the annual premium). It's a way of looking at things.
But what if we thought of alternatives in the same context in which we present whole life insurance values?
The Guaranteed Book for Your Other Investments
We express our dissatisfaction with the guaranteed loss of our entire lives from the beginning, so what if we treated traditional investment options as if we were making full life insurance? I took historical data from the iShares Corporate Bond ETF (LQD) and ran the past five years through a pro forma that matches an entire life insurance illustration. This is how it develops:
There are a lot of zeros. It turns out that investing also guarantees a loss from the beginning as well. And the guaranteed loss is significantly greater than the guaranteed loss on an entire life contract. There is also no death benefit to the investor, despite the significantly larger guaranteed loss.
Now perhaps some can object to the above scenario by noting how unlikely it is for such an investment to go to zero. I agree with. However, I note that the probability that an entire life contract only achieves its guaranteed results is similar to the probability.
The non-guaranteed accumulation values seem to take precedence over the non-guaranteed forecasts from the entire life illustration. But note that the increase in cash value year over year is certainly not linear. In fact, the growth of cash value in a truly comprehensive policy that earns dividends will sometimes not increase with an ever-increasing number year over year.
If the dividend rate falls significantly, it is possible that growth in cash value may fall during the previous year. Pay special attention here, I am not saying that the cash value will be less, I am just saying that the growth in cash value may be less than the year before.
But go back to the whole life illustration above and notice that the guaranteed accumulation of cash values also gives a constantly growing result year over year. This means that a very large reduction in the dividend can result in an absolute growth in cash value that is less than the previous year, but the guaranteed accumulation of cash value in an entire life policy will probably make this difference extremely small. Let us also not forget that the guaranteed accumulation of cash value in an entire life policy improves as non-guaranteed functions develop.
This means that the ever-increasing guaranteed amount of cash value increase each year improves enormously beyond what we see when we look at an illustration. It also means that the guaranteed values will improve significantly as actual non-guaranteed elements are developed.
Had I really followed the rules of the whole life insurance, I would instead have used an average of the returns achieved by the ETF over the past five years and used that value for project values. Doing so would have resulted in estimated cash values at year five between $ 140,000 and $ 145,000. But still, I get no death benefit.
And these results change depending on what day or month I actually bought for the ETF. Whole life insurance, on the other hand, will deliver the same return no matter the day or month of the year I buy it. I do not have to worry about fluctuating markets due to a bad revenue call, an international pandemic or any other big story that laughs at the bond or stock market.
Why is he talking about the death benefit
I know there are some of you who will happen on this blog post and say "who cares?" every time I mention the death benefit. You may belong to the group of people who believe that you will achieve some form of platinum saver status when you have "self-insured" against the risk of dying early – what exactly that means.
I mention the death benefit part because it means something. Many (including me at the same time) discount the value of a death benefit. Many of us believe that death is far away in the future and there is no way this type of thing will happen to us. But the death benefit has serious value for it. It creates an immediate property for those who have it.
I'm quite happy to know that I'm ignoring all future decisions I make about new life insurance purchases, I'll at least have a seven-digit death benefit in effect just because I choose to buy an entire life insurance policy in my 20s. For me, the focus was much more on the cash collection, and that's still the aspect that makes me more excited right now.
But if someone one day shows up and offers Brantley and me several million dollars for Insurance Pro Blog and I find myself with a new pot-o-money that was not part of my original retirement plan, I will certainly not cancel my life insurance.
The fact that I have the death benefits, the fact that I am guaranteed a certain level of cash value and cash accumulation forever and ever and I get this death benefit with the opportunity to keep it as long as I want that it makes for a good deal in my eyes.
The whole life insurance is much more comprehensive in its reporting
The whole life insurance (or really all life insurance with cash value) is incredibly more comprehensive in its reporting of assumed and guaranteed components than any other financial vehicle that I am aware of. This is both a blessing and a curse.
It's nice to see how far life insurance companies go (sometimes it's voluntary and sometimes it's a legal requirement) to try to explain the many aspects of what could and what happens if you buy life insurance.
At the same time, this understanding can cause a lot of confusion and deliberate misconception by those who want to sell you on an alternative idea. Some assume that because other savings or investment options do not have as much detailed explanation, these options do not have to struggle with the same number of obstacles as whole life insurance. It seems like a logical thought process, but unfortunately it is poorly thought out.
The truth is most if not all of these alternatives have as many, if not more, stumbles and asterisks to control. The norm for most investment plans, however, is to ignore many of these obstacles and instead sum it up by mentioning that investments involve risk and that the results are not guaranteed. That statement is similar to the general ledger I produced above, but I will bet the zeros in the above magnitude capture much more attention than a fine print that says something to the effect of "results not guaranteed, investment involves risk of loss."