Some things never go out of style, and whole life insurance is one of them. At the end of the first quarter of this year, sales of whole life were up six percent. It now represents 37 percent of all life insurance sales in the U.S., surpassed only by UL–at 39 percent of market share–and the difference between the two continues to narrow. This is the eleventh consecutive year of growth for whole life, and it’s predicted that it’s heading for a twelfth.1
Why all the renewed interest in whole life insurance? Because it provides guarantees in an unpredictable world: Guaranteed premiums that will not increase for the life of the policy, a guaranteed death benefit, and guaranteed cash value that accumulates on a tax-deferred basis. What can this mean to your clients? Peace of mind. As long as they pay their premiums before the grace period ends, their coverage will never cost more nor be worth less than the day they purchased their policy, no matter what happens in the economy or in their lives. In fact, with whole life, the cash value of their policy continues to grow at a guaranteed rate for the life of the policy. What other products or services are guaranteed to never increase in price and not only hold their value, but increase in value over time?
In addition to the advantage of level premiums, whole life provides both guaranteed living and death benefits. This means your clients can borrow against the cash value in their policy throughout their lives, for any purpose, and in many cases without incurring income tax. Having liquidity, access and control of their money whenever they need it, provides clients financial flexibility. They can use the cash value in their policies for emergencies, unexpected opportunities, college planning, and even to create a stream of income to supplement their retirement.
With whole life, what your clients want to happen will happen—no matter what curves life throws their way. Whole life’s guaranteed death benefit can even enable them to spend down more of their assets during retirement and still provide a legacy to their loved ones. So even if they get sick and experience unexpected medical expenses, or inflation or taxes are higher than they anticipated and eat up some of their assets, their policy will still provide an income tax free death benefit to their loved ones–whether they die one day after the policy is issued or decades later. What other product can fulfill those promises?
With all these advantages, why aren’t more people rushing out and buying more and bigger policies? It’s probably safe to say that, in general, life insurance has an image problem. It appears complicated to many people and the cost is often overestimated. Say the words “life insurance” and many people conjure up images of death–a subject most people would prefer to avoid. According to LIMRA, life insurance falls into the nice to have category, while more often auto, homeowners, and health insurance are must haves.2 Life Happens seconds this dilemma: “More people protect their ‘things’ with insurance than protect their loved ones with life insurance.3
Additional reasons life insurance may sometimes be a challenging sale? For many people, there is no real urgency to buy. But statistics show the industry may be partly to blame. According to a recent survey, only five percent of consumers spoke with an agent or broker about life insurance during the past year. This suggests we may have to find new ways to engage and reach potential customers. And then there continues to be an issue of trust. Studies indicate that consumers consider the banking industry easier and more convenient to use and more likely to treat consumers fairly than either life companies or investment companies.2
Finally, there are the financial gurus that proliferate in the popular media who maintain that whole life’s guaranteed cash value provide a poor rate of return, and that if you need life insurance, buying term and investing the difference is the way to go. But the truth is, if your clients buy term insurance, they are paying for a death benefit their loved ones may never receive if they don’t die during the term of the policy. Once your clients reach the end of the term, the death benefit is gone and now, if they want to leave a legacy, it’s up to them to split the nest egg they’ve acquired into two parts—what they want to live on and what they want to leave their loved ones. This isn’t easy, especially if their investments have suffered losses or their living expenses are higher in retirement than they anticipated.
Guarantees: A Buffer against Risk
Whole life offers more value than just a rate of return, because its guarantees provide a buffer against risk. Even if your client’s plans change over time, unlike other types of life insurance, the guaranteed cash value in a whole life policy provides an exit strategy that doesn’t require anyone to die to reap the benefits of the product. With whole life your clients can enjoy a variety of non-forfeiture options including cash surrender and reduced paid-up options.
Although planning is certainly important in order to try to make dreams come true, none of us knows nor has control over the future. That’s how guarantees can help. Take for example taxes. Many believe that because income will be lower in retirement, income taxes will be lower too—but this isn’t always true. In fact taxes can actually be higher, especially once a person reaches age 70-1/2 and has to start taking required minimum distributions (RMDs) from their retirement accounts. In some cases RMDs can drag as much as 85 percent of a couple’s Social Security benefits into their tax return. In addition, while income taxes have recently been historically low, an improving economy and changes in the tax code could push them much higher in the future. And since many retired people have fewer items they can deduct on their taxes–because their mortgage is in many cases paid off and their children are grown–taxes could be a larger expense than your clients anticipate.
How can you combat risk? With guarantees. And what better product to use than whole life insurance? After all, banks have been using it for this purpose for decades. They have a portion of their assets that they have to put in the safest investments available, Tier 1 Capital, so they often put the maximum amount allowable by law in life insurance. In fact, in the banking industry, high cash-value permanent life insurance is known as the bank’s bank.4 And if this wasn’t proof enough of the advantages of guarantees and whole life insurance, just look to some of the largest corporations, like Walmart, General Electric, Disney, Time Warner, Inc., and Johnson & Johnson. These companies fund their executive compensations and pensions with whole life insurance because they want guaranteed money to be available when they need it.4
Why is whole life so safe? Because unlike banks, life insurance companies don’t use excessive leverage. If a bank has $1 million on deposit, it may lend out up to $10 million to the public. On the other hand, if a life insurance company has $1 million on deposit, that company may loan no more than $920,000, and usually only a fraction of that. As such, life insurers are 100 percent reserve based lenders, which makes them stable institutions in down economies.5
A Guarantee Is a Guarantee—Anything Else Is a Variable
In “Optimizing Retirement Income by Combining Actuarial Science and Investments,” Wade D. Pfau, Ph.D., CFA, a professor of retirement income at The American College for Financial Services and principal and director for McLean Asset Management and Solutions, reports on a study he conducted on two couples, one in their 30s and the other in their 50s. He found that even with a conservative spending assumption, because investment portfolios don’t have guarantees they remain vulnerable to depletion. However, when an integrated approach with investments, whole life insurance and income annuities is taken, a more efficient retirement outcome is produced rather than relying on investments alone. His take away? That younger individuals planning for retirement and needing life insurance may see whole life as a tool for retirement income planning and that “buy term and invest the difference” is less effective when viewed in terms of the risk management needs of a retirement income plan.6
So why is whole life insurance always in style and gaining in market share? Because of its guarantees, which make it evergreen–independent of the economic climate or the uncertainties of life.
- LIMRA 2nd Quarter 2017 Industry Briefing.
- “Life Insurance in a Tough Economy,” LIMRA, 2010.
- Your Love Study 2017, Life Happens.
- “The Banks Biggest Financial Secret Revealed,” Valhalla Wealth, 7/12/15.
- “The Case for Investing in Life Insurance,” Barry James Dyke.
- “Optimizing Retirement Income by Combining Actuarial Science and Investments,” Wade D. Pfau, Ph.D., CFA, 2014.