Whole Life Insurance Pros and Cons

First, I feel the need to provide context for this post. 99% of our clients want to use cash value life insurance as an asset class. Which means people need to distinguish whole life insurance from indexed universal life insurance.

Yes, there are other products.

But none that we feel are worthy of consideration.

Which is better?

What are the pros and cons of each? Why would a person use one versus the other?

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TEFRA DEFRA TAMRA: How Taxes Effect Life Insurance

life insurance policies have tax rules

Life insurance enjoys some unique tax benefits, but it also faces limits imposed by legislation we know as TEFRA DEFRA and TAMRA.  These pieces of legislation established specific guidelines as to what you can and cannot do with life insurance.

Each of these pieces of legislation creates rules that agents, policyholders, and people looking at whole life or indexed universal life insurance (or any UL product) should know.

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2015 Operational Cash Flow Growth for Whole Life Focused Life Insurers

We’ve reported on operational cash flow among life insurers in the past and note that we hold this metric in high regard for a multitude of reasons.

Our philosophy is that operational cash flow shows us true profitability of a life insurance company, especially among whole life focused insurers. Why is that? Well, it's primarily because life insurers have a unique income reducing option at their disposal with policyholder dividends.

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Whole Life Insurance Five Year Investment Income Trend

Investment income is a huge profit driver for life insurance companies.

We've spent a lot of time analyzing and reporting on overall investment yield trends for life insurance companies, but that analysis only compares the raw yield insurers achieve on their managed asset pool.  It's possible that a declining yield simple indicates a de-risking strategy.

Investment income is not necessarily declining and the insurer is under no real financial trouble.  In fact, we've made this argument several times when discussing these trends and others.

So if we instead look at

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Five Reasons Whole Life Insurance is Better than a 529 Plan

 

The 529 Plan began to materialize in the mid 1990’s taking inspiration from prepaid tuition programs in the state of Michigan.

Since the initial formation it has become the dominate recommendation among financial gurus for college savings in the United States—despite President Obama’s suggestion that we end the tax free distribution 529 Plans enjoy during his 2015 State of the Union Address.

Despite the overwhelming support the financial media expresses for 529’s Americans still overwhelmingly choose basic savings accounts to save for college.

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The Power of Whole Life Insurance in a Down Market

 

A few weeks ago a client of ours (we’ll call him Ted to protect his identity) reached out to us looking to take a policy loan from a whole life policy he owns.

A unique and, arguable rare, opportunity arrived on his door step (literally) and he needed cash. The interesting part of this story, though, is not that whole life cash values were available to him so that he could seize the opportunity but rather that he had plenty of other money he could have used instead.

There was just one problem,

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Risk Adjusted Return for Life Insurance Assets – Whole Life Insurance

I personally take risk adjusted rate of return very seriously. My focus on it largely comes from the notion of taking calculated risks to achieve various levels of return. For example, one might make a killing placing his or her entire life’s savings into a pink sheet stock, but risk exposure relative to the anticipated return is likely extremely unattractive.

One of the elements we find so attractive about life insurance in your portfolio is the stellar risk adjusted rate of return. But how do various life insurers themselves rate when it comes to the return they achieve on their policyholders’ money and the risk they must shoulder to achieve it?

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Life Insurance as an Income Producing Asset with the Power of Leverage

 

We’ve talked a lot about using life insurance as an income producing asset. Many people stumble a bit when they first attempt to wrap their head around the notion of using “insurance” either as a place to save money or as an asset from which they can generate income. 

I raised an eyebrow or two when first presented with the idea. Today’s discussion is not an introduction to the concept of using life insurance as an income source, but rather a somewhat advanced look at why it can work so well.

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Case Study: Whole Life Insurance vs. Bond Strategy

 

We receive phone calls and emails every week from people looking to “de-risk” their portfolio and possibly add life insurance as a complement to their other investment and savings strategies.

A comment that tends to trend among these good folks notes that while we’ve done a pretty decent job explaining the more esoteric aspects of life insurance (according to the comments) it’s still somewhat difficult to understand exactly how this works and why it’s beneficial.

I can accept and agree with this comment and in an attempt to build out more comprehensive understanding I'd like to present a case study today that highlights some of the power behind life insurance when used as an asset in one’s portfolio. We’ll be publishing several more of these in the coming year. While we’ve been given permission to share these stories, names have been altered a bit to protect identity.

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