A common argument in the financial services world is whether or not whole life insurance is a viable asset to store money inside. Conventional wisdom from the best financial influencers in the world would have you believe that whole life insurance isn’t worth it.
The Suzie Orman’s and Dave Ramsey’s of the world say, “no.”
Your mutual fund manager would say, “hell no.”
You’ve probably even heard the words, “scam” or “waste” by your broke uncle at a family gathering when whole life has been mentioned.
What if I told you that all that conventional wisdom was masking the truth when it comes to building sustainable, long-term wealth? What if I told you that the biggest banks and institutions, wealthiest families, and largest corporations don't follow the same advice that they give you on a daily basis?
Now, before we really get into it, understand that I don’t blame anyone for not knowing this stuff. Assuming that your hard-earned dollars should go into the market via 401k or Traditional IRA or strictly relying on your pension for retirement is the best way is the “group think” of the financial world. Even worse, if you—or me in a prospecting meeting—provide any substantial evidence to prove that as fact, (the wealthiest in the world use this form of wealth building as opposed to what they tell us) it’s an all-out fist fight!
These conversations look a lot like:
Which, by the way, pineapple is delightful on a BBQ chicken or Canadian bacon pizza so, let’s stop the hate, shall we?
In other words, this topic becomes tribal.
You take one side, completely disregard the other, and completely identify as one over the other. Unfortunately for the naysayers in this particular conversation, there’s really only what’s actually happening and what isn’t happening.
What’s actually happening is banks have more money invested in life insurance policies than they do in CD’s, money markets, savings accounts, fixed assets, and all other real estate assets, combined. So much so that by the end of 2010, bank-owned-life-insurance (otherwise referred to as BOLI) assets reached a record high of over $140 billion dollars. By the first quarter of 2012, that number was over $145.6 billion, and climbing, to the tune of roughly 8.7% year over year.
Banks believe—that when it comes to their own money—it’s better to preserve it and grow it at a low rate, without the possibility of losing than it is to throw it at publicly traded companies that over leveraged and under managed with no guarantees.
So, no… they don’t practice what they preach. But who can blame them? After all, banks lend the money, you accept the terms, and pay back the loan, plus interest. They also own the biggest and nicest buildings in your local town or city, so I’d say they are doing this thing correctly. Business is certainly good.
I love how Barry James Dyke explains it in his article, “The Case for Investing in Life Insurance,”
“Why do banks look to insurance companies for sound investment? Unlike banks, life insurance companies do not use excessive leverage. If a bank has $1 million on deposit, it can lend out up to $10 million to the public. This leverage is called “fractional reserve lending,” and it can lead to instability. Indeed, excessive leverage is a major reason why banks are failing today and have throughout history. However, if a life insurance company has $1 million on deposit, that company may loan no more than—in most cases-- $920,000, and usually only a fraction of that. As such, life insurers are 100 percent reserve-based lenders, which makes them stable institutions in down economies.”
So, if the biggest corporations and banks are utilizing cash value life insurance as a stable and reliable source of reserves, why aren’t you?
Banks and money managers tell us to keep money safe in CDs and mutual funds, then on the back end tell us to cross our fingers and hope for the best. The investment advice they give casts a façade on assets that are incredibly volatile, illiquid, and seemingly fake, while they cash in on real assets such as life insurance and real estate.
After all, take a look at all the stadiums and arenas and massive buildings in this country—they’re named after either a bank or an insurance company (for the most part).
“The banking industry—one of the most powerful and influential industries in the United States-- has a deep affection for cash value life insurance and treats it like a golden asset.”
In fact, banks and massive corporations value life insurance so much, that in most cases, the money from the cash value of the policies owned by banks generally will be utilized to offset costs of employee benefits, such as healthcare, 401k plans, and vacation days to name a few—all while helping them reach government sanctioned capital requirements.
Furthermore, why would a bank use one of their own products-- that offer minimal to no interest rate or tax advantages-- when they could enjoy guaranteed growth, tax advantages, and hard asset allocation on the balance sheet(s), all while the same policy can be used as collateral to buy more hard assets?
Did I forget to mention that death benefit distribution is tax free? Well, it is. Of course, discussing your inevitable mortality can be cause for an uncomfortable conversation. But in most cases, I’ve found that it’s difficult to argue the clearly stated tax implications of literally any securities account compared to an ever-growing death benefit of a whole life policy being tax free, it’s an absolute no-brainer when it comes to which is better.
“But Grant, I can earn more on an investment at 6-8% than I can with a whole life policy.”
Sure, you could make that argument. But it’s always interesting when it comes to securities accounts or even something as simple as bonds are concerned that the tax conversation isn’t always clearly stated in the distribution of said asset.
So, it’s not even fair to compare the net equivalent. Cash value life insurance, which is always tax free (as long it’s not a MEC), because the net gain is always superior to even an 8-10% return on a securities account.
Where do you go from here?
Well, it’s safe to say that with the current climate of financial disdain, personal economy across the U.S. is in a scarier place than most people would like to admit.
The FED continues to print money, the government continues to pass out entitlement payments like candy, and thus, inflationary environment will soon take hold. This is a domino effect, by the way. The writing is on the wall when it comes to people taking unemployment as opposed to working a job, for instance. You'll see prices on goods and services skyrocket because wages will have to increase because nobody wants to work because people can get a check sitting at home. This is simple math. Your securities-based accounts aren't safe, your future tax implications aren't safe, the economy is in a more volatile place than ever and the FED continues to keep interest rates artificially low. All the while, your money manager tells you that the market is scolding hot because, hey, people are making money in the markets right now.
This is a recipe for disaster-- take the time to consider cash value life insurance. If it's for you, great! If it's not, you at least took the time to be proactive about exploring it.
Let's wrap this up...
In every financial climate, cash value life insurance has stood tall. There are lessons to be learned here and practices to be applied.
- Long-term thinking vs. short term speculation
- Anticipate and prepare for inflation and future taxes
- Invest into assets that maintain or outpace inflation
- Build equity and ownership in real, hard assets
- Avoid speculative, high risk investing
- Reduce or avoid deferred taxation
- Don’t lose money
And always remember, while the “financial experts” of the world critique and poke fun at cash value life insurance, remember that the bedrock of our financial institutions are etched in stone with…
Cash value life insurance.
For more, visit www.lyvfin.com