How whole life insurance can play an important role in a financial plan
by John BuddMr. Budd is Practice Leader for the Workplace Solutions business at Massachusetts Mutual Life Insurance Company (MassMutual). Visit massmutual.com
A fundamental tenet of effective investment diversification is the selection of non-correlated assets within a portfolio. Assets such as large- and small-cap US stocks, international stocks, real estate, government and corporate bonds, precious metals, and other categories often perform differently from each other. They rise in value at different rates while others may be falling.
During the financial crisis of 2008, for instance, the price of gold rose in value1 as equities, real estate and other assets declined precipitously. Also, during the tech stock meltdown in the early 2000s bonds advanced while equities fell significantly.2
When providing guidance to individual or worksite clients, financial professionals have yet another way to help them with their financial plan. While many people focus on increasing the value of their investments through return seeking assets, too few focus on protection products, such as whole life insurance, as a versatile financial asset that can help them effectively address different financial needs during various stages of their life.
It’s true that not everyone necessarily needs life insurance. But anyone who needs to protect a family from the death of a breadwinner, secure business interests against the loss of a key employee, or wants to leave a financial legacy to loved ones or a favorite charity may want to consider including life insurance as part of their overall financial plan.
A ‘Differentiated’ Financial Product
Participating whole life insurance offers a combination of features and benefits that differentiate it from other financial products:
- Permanent life insurance protection
Whole life provides lifetime coverage with fixed, guaranteed level premiums that ensure the policyowner has predictable costs for the lifetime of the policy. Upon an insured’s death, whole life insurance pays a guaranteed death benefit that beneficiaries can use to continue their lifestyle, help pay college tuition, settle debts or meet other financial needs.
- Cash value accumulation
The policy builds cash value over time based on the policy’s provisions. The policy’s cash value is guaranteed to increase each year and will never decline in value due to market conditions.
- Policy dividends
Many whole life products are participating and eligible to receive annual dividends. This is in addition to the guaranteed interest rate of the policy. Although dividend payments are not guaranteed, they offer the policyowner flexibility and can be received in cash, used to reduce premiums, or increase life insurance protection and the cash value, based on the policy’s provisions.
- Income-tax advantages
Whole life insurance offers tax advantages. The death benefit is generally received income tax free, cash value grows tax-deferred, and cash values can be accessed without triggering taxes. Distributions under the policy (including cash dividends and partial or full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis)3.
A Complemental Strategy
Individual whole life insurance has been prevalent for generations. In 2018, sales of whole life at the workplace increased by 17 percent from the previous year and may be a good complement to group term coverage4. Group whole life can enhance an employer’s benefits package and add to the company’s financial wellness program. Group term life insurance provides a death benefit for an insured for a specified period of time. Some group term products are not portable and a coverage gap can occur when the insured leaves the employer or retires. Whole life policies remain in force as long as the policyowner pays premiums. Also, term does not accumulate cash value and the premiums can increase over time if the coverage is renewed beyond the term period.
The cash value accumulation within a whole life policy can be an important source of money in times of need through loans or partial surrenders. During and immediately after the Great Recession – from 2008 through the first half of 2010 — MassMutual reported that loans from whole life policies increased by $600 million, or approximately 12 percent. This increase in loan use suggests that loans played an important role in meeting financial needs in a difficult time.
The cash value from a policy can be used for any reason, including as a source of emergency funds, or longer-term needs such as helping to pay college tuition or other educational expenses. Whole life policies also can be valuable when planning for retirement. The death benefit can provide a source of supplemental retirement income to help replace the loss or reduction of Social Security benefits or pension income after the death of a spouse.
Of course, accessing cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. It’s important to consider the impact to your policy when taking any distributions.
Whole life policies can be used to meet a wide range of financial needs. The policies’ many applications enable financial professionals to offer clients greater protection and flexibility in their financial planning. And whole life offers another important benefit: diversifying the value advisors provide through your practice. ◊
1. Gold Price History from 30 B.C. to Today, The Balance, https://www.thebalance.com/gold-price-history-3305646
2. The assets that do best in a market downturn, CNBC.com
3. If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59 ½.
4. LIMRA’s U.S. Worksite/Voluntary Sales Study, May 2019, https://www.limra.com/en/newsroom/news-releases/2019/total-u.s.-voluntary-market-grows-3-in-2018-limra-reports/