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Whole Life Insurance: Stability in an Unstable World

It is not news that the economy has gone into a downward spiral damaging investment portfolios, employment rates, and retirement plans.  However as we watched our investment statements decline and the cash values in our Universal Life policies diminish, one thing stayed constant...Whole Life Insurance. 

Whole life insurance lost momentum in the 1970s, however those who chose to purchase a policy have seen little to no change during the economic downturn.  The annual dividends were paid and the cash values continued to grow.  If we look at Great West Life, despite the economic destruction they were able to maintain their current policy dividend levels into 2009, offering their policyholders stability and confidence.

Why you ask? Well let’s look at how whole life works. The premiums of participating whole life policies are more expensive than the other alternatives.  This is because the insurance company uses conservative projections on death claims, investment returns, lapses and administration charges.  Every year they tabulate the actual expenses incurred and refund a portion of the difference in the form of a policy dividend.  This portion is usually quite high; looking at Great West Life again, they distribute 97.5% of the surplus to the policy holders.  These dividends increase the cash value and death benefit over time.  All funds are invested by the insurer’s team of professional investment managers.  The dividend payments are not guaranteed; however once they are paid out they are automatically vested in the policy and cannot be reduced by the insurer. 

During the economic decline, factors which determined the dividend payment did not experience substantial losses.  Mortality rates did not change, expenses remained constant, and the majority of the policyholders’ assets are held in fixed income or money market securities providing for a very conservative asset mix.

You may be thinking… but it’s life insurance, not an investment.  True, whole life policies are life insurance but these policies accumulate a cash value within the policy which earns tax free returns.  Policy holders can borrow against this cash value or take a policy loan giving them access to the funds during their life time.  By accessing the funds in this manner, the money received remains tax free. Also, dividends are still credited to the policy and the cash value still earns returns as if the loan does not exist.  The outstanding loan, including interest is then repaid by the cash value should you cancel the policy, or paid from the death benefit in the case of death.  Simply stated, this untaxed financial vehicle allows individuals to dump in extra cash that grows tax sheltered and draw upon it when needed without losing sleep over market downturns and fluctuations.

As stated by investment guru John E Girouard, “Few people know that the life insurance industry was one of the few economic sectors to survive the Great Depression intact.  It was one investment that kept its promises.”

If you would like more information as to how whole life insurance can work for you, please contact our office.

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