I'm not going to commit personal finance heresy when I say that as we get older safety of principal becomes way more important than rate of return (personally I believe it's a lot more important even for the younger crowd than a lot of people would have you believe, but that's a fight for another day), today instead I want to talk about Single Premium Whole Life. Also, as people get older and tend to realize they aren't immortal, life insurance suddenly becomes a lot more coveted. If you want to set me off on a several hour long discussion about putting things in order before it's too late, ask me about the number of people in the 60+ crowd I've talked to who stress over whether or not they can afford that 20 year term premium and if they think they'll be dead in the next 20 years so they can “make good on the policy” (copious amount of forehead slaps understood).
Enter Single Premium Whole Life Insurance…
Single Premium Whole Life insurance (herein SPWL) is an immediately paid up whole life contract that is (also by insurance definition) a Modified Endowment Contract (MEC). It functions a lot like a Paid-Up Addition (PUA), and you don't need to spend much time around here to know that we're huge fans of PUA's. There is a difference, though as PUA's are not MEC's and do not turn a contract into a MEC (they can if too much money goes into the policy, but there are several fail safe mechanism in place on just about all contracts to ensure against this).
In year 1 the SPWL cash surrender value is traditionally very near equal the single premium put into the policy, and by year 2 there's usually a net gain in the policy, meaning one can traditionally get a positive return on their money in a SPWL much sooner than with most other whole life contracts making this an ideal product for the older crowd.
We know that participating whole life insurance–contracts that earn dividends–is our highly recommended contract type. Meaning that even as a single dump in of money, it can grow despite outstanding loans (e.g. when you take the money out for something), and with a non-direct recognition contract you'll earn the same dividend regardless of loan status.
The fact that SPWL is also a Modified Endowment Contract is a source of resistance from some people. If you feel yourself doing the same thing, don't worry. Truth is, however, that as a MEC, the cash in the policy behaves a lot like an annuity, only difference being it has two awesome additional benefits:
The rate of return on a SPWL contract is going to be similar to other low risk assets. We've traditionally seen returns between 4 and 5% depending on age and size of the policy. Not too shabby for a product that affords the additional benefits of SPWL. Keep in mind that the cash surrender value on SPWL, like cash surrender value on any whole life contract, is contractually guaranteed not to decrease (unless of course you take some of the money out through a bona-fide partial surrender).
Additionally, it should be noted that since there's a death benefit, the policy owner has more leverage over the other financial decisions such as
When we internalize these benefits, it's easy to see that total economic benefit of this plan greatly augments overall rate of return. It's hard for some finance professionals to wrap their heads around this (in large part because they suck at math; that's why they ended up being business majors instead of Engineers).
For those who are really looking to ramp up the cash component, there are some contracts out there that will allow the policy owner to keep their SPWL death benefit low and throw tons of paid up additions in the contract…awesome! This would actually be the preferred method. This ensures an even better cash performance from day one. Please don't get taken for a ride from a disingenuous agent who wants to hawk his company's product, though. Make sure that you are purchasing a bona-fide SPWL contract, and not a full pay contract that the agent is simply loading a bunch of PUA's into and using an offset to trick you into thinking it's paid up. This will hurt overall policy cash performance, and there's no need to do it, just stick with Single Premium Whole Life.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
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