In the last email of Life Insurance Awareness Month of 2022, I will attempt to shed light on a topic that the life insurance industry hasn’t, in my opinion, done a good job in explaining very well, and that is the benefit of whole life insurance.
Prior to 1979, there was only two types of life insurance; term and whole life. Back then, whole life was looked upon much more favorably than it is now. One reason is that it didn’t have as much competition from other financial products as it does today. Back in the 50’s, what choices did middle-class Americans have? Basically, a savings account, unless one was aggressive, and then they could open a brokerage account. There were no 401(k)s, IRAs, money market accounts, and very few mutual funds. So whole life was attractive.
How attractive? Well, some people had enough cash value in their policies to start or save their business. JC Penney used a loan from his cash value to meet payroll during the depression. Walt Disney, unable to get financing from his bank for his hare-brained idea of a family amusement park, used his cash value to help finance the creation of his dream, Disneyland.
Ray Kroc used his cash value to help buy out the McDonald brothers and start the largest hamburger chain in the world. In 1980, Doris Christopher used a $3,000 loan from her life insurance policy to start Pampered Chef in her basement, a company she sold to Berkshire Hathaway in 2002 for $1.5 billion.
So whole life is more than just death insurance; it can provide myriad benefits while the owner is still alive via a device, unfortunately, called a loan. I say unfortunately because it is the only “loan” I’m aware of where employment is not a prerequisite, repayment is not required, and the use of the proceeds need not be disclosed. “Lien” would be a more appropriate term, as it is actually a lien against the death benefit.
I’ve had clients use their cash value to help fund education, weddings, cars, and gaps in employment as well as things that they probably shouldn’t have, such as vacations, big screen tvs, and furniture. The point is, the cash was available when they wanted/needed it because they had made those premium payments for many years prior.
I write a lot more term insurance than whole life, for two reasons. One, young families often don’t have the wherewithal to fund their entire need with whole life, nor should they even if they could. The other reason is because many people in their 50s and 60s still have a need for coverage because they bought only term when they were young and instead of investing the difference, they spent the difference.
One of the biggest lessons history can teach us is that things change. What appears to be true to us in our 20s and 30s sometimes turns out not to be true, but sometimes it’s too late to act on the new knowledge.
Remember, life insurance isn’t designed to make you rich, it’s designed to keep you (and your heirs) from being poor. My cash values are higher today than they were on 12/31. I only wish the same were true of my IRA.
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