I was recently introduced to a woman who has a whole life policy that she bought 31 years ago from a major mutual insurance company. The agent who sold her the policy is no longer in the business and she wanted some help from me in explaining exactly what she had. Specifically, she remembered the agent telling her that she could stop paying the premiums at some point in the future and still maintain coverage.
The policy had an original face amount of $100,000 and carried an annual premium of $835. Because she used the non-taxable dividends to buy paid-up additional insurance, the death benefit is now $203,460 and her cash value is $59,088. Because she paid the premium every year for the past 31 years, her last annual dividend was $1,118.
So yes, she can stop paying the premium and keep the coverage by using future dividends to pay the premium. While dividends are not guaranteed, the company that she has her policy with has paid dividends every year since 1869. Next year’s dividend could conceivably be smaller than this year’s dividend, but the odds of that company not paying dividends is infinitesimally small.
She’s done the heavy lifting, so she can kick back and the policy will continue to chug along using its own values. Or she can continue to pay the premium and the cash value and death benefit will grow even faster. She has options.
If we had looked at this policy’s performance after five or even ten years, it wouldn’t have looked nearly as impressive. Compound interest, what Einstein referred to as the eight wonder of the world, takes time to work its magic. It too isn’t very impressive over short time spans.
But Ron, wouldn’t she have done even better had she bought a term policy and invested the difference. Possibly. Probably not, but possibly. I say that because had she bought a term policy 31 years ago, she would either have no insurance today or be paying more than the premium on her whole life policy. There were, to my knowledge, no 30 year term policies on the market 31 years ago, so she would have had to make another purchase at age 44, and age 44 term rates are at least 50% higher than age 24 rates, and that’s if she qualifies for the same underwriting classification, which isn’t guaranteed.
The bigger reason why that strategy probably would not have beat her whole life policy is, what expense would be the first cut when things got tight? Not the vacation. Not the cable bill. Not the holiday gifts. No, it would almost certainly have been the investment outlay.
While some concepts work in theory, for a variety of reasons, their transition to the real world isn’t always what the theory would lead you to believe.