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The answers, in my opinion, are, "it depends" and "probably." But these answers, in isolation, don't consider -- please pardon the pun -- the "whole" picture. A good whole life insurance policy is an important building block of a well-balanced portfolio and smart financial strategy. It can help meet some very specific financial goals, and at the same time offers the kind of stability that helps investors stay the course, particularly in today's volatile economic climate. Of utmost importance is building good business relationships with your clients so that you thoroughly understand their financial needs, and help them understand how a well-constructed life insurance plan is the foundation of their overall financial plan.
Term insurance, for instance, is the most efficient way to cover a temporary need. Most people probably should own some term insurance for many reasons that are beyond the scope of this article. For clients who want their insurance to actually be in force at the time of death, however, a certain amount of permanent insurance is key. Whole life insurance can be an ideal solution. Not only does whole life provide a permanent guaranteed death benefit, but most policies also have an optional disability completion rider, at an additional cost, that enables the policy to be fully funded in the event of disability. (All guarantees are based upon the claim-paying ability of the issuer.)
The permanent death benefit of a whole life policy can be used to great advantage. For example, the significant peace of mind offered by life insurance can allow an aging couple to spend their accumulated assets, and even principal, as one of their deaths approaches. The knowledge that their assets can be replenished for the surviving spouse through the proceeds of a life insurance policy is very comforting.
In addition, this permits the surviving spouse to once again spend financial assets while alive, with the security that there will be a death benefit to provide for what could be a number of end-of-life purposes, such as inheritances, charitable intentions, final expenses, and the care of other dependants. A permanent death benefit could be used for costs ranging from collateral for loans to repaying a reverse mortgage at death, or even paying for care in an assisted living facility or nursing home.
When most clients begin to grasp the countless uses that the permanent death benefit could be leveraged to provide for, their first response is, "You mean I can spend my money while I'm alive instead of having to worry about leaving it behind?" Most of my clients believe that if they cannot spend their money while they are alive, for fear of running out, then what they are forced to leave behind is technically a cost to them.
Aside from the diverse uses for death benefits, whole life insurance is a safe option that can hedge against decline in other areas of the client's portfolio. Whole life can offer an increasing cash value that does not drop in declining markets with other asset classes (such as the stock market, real estate, etc.) with the added value of giving the owner the courage to stay in those asset classes, even when their gut says get out now and put the money under the mattress.
It has been proven again and again that people with the fortitude to stay the course with these more aggressive asset classes in well-managed, diversified ways have been rewarded. Whole life can help investors resist the inclination to panic and sell at the bottom. Because it provides the opportunity to tap into money when other asset classes are down, whole life encourages the investor to persist in his strategy until the market recovers. Of course, loans and other policy withdrawals will adversely impact cash values and/or death benefits, and an investor may receive less than the original principal, so this consideration should be discussed between advisor and client.
Ideally, over the long term, a well-managed, well-diversified equity portfolio will outperform a mostly bond-based portfolio of even the most well-managed insurance company's general account. Even the most experienced, aggressive investors want to lighten up on risk as they get older. This is especially true when portfolios are no longer being accumulated, but are instead turned around and used to produce income.
No matter what statistics are produced that show the folly of being out of the market for the past 20 or 30 years of one's life, some people believe this is their only option, and a prolonged stretch of downturn in the market almost always forces their hand. Why not have a steady, reliable asset class that is available for access during these inevitable downturns? Given an alternative, people are less likely to run to savings accounts, money markets, and CDs with long-term money at the first sign of trouble. Why shouldn't we have this asset class provide other necessary protections as well?
From my perspective, whole life insurance is the ideal choice as the foundation of a well-managed portfolio. After all, it protects against three of the things that can ruin a family's finances: death, disability, and emotion. I believe that the benefits of whole life insurance have been largely forgotten in the insurance and financial planning industry. The responsibility therefore falls largely on the advisor to explain this approach in a clear manner, outlining the benefits and preparing the client for each step in the overall financial planning process. Particularly in the current, uncertain economic climate, investors need to feel a strong sense of security with every decision they make. If these benefits were thoroughly explained to clients, with an effective demonstration of how whole life can play an integral role in an overall strategy, whole life as an asset class would be much more widely used than it is today.
Jason Rucker is a producer and member of 2007's top career agency of the Penn Mutual Life Insurance Company, the Andrus Agency, located in Salt Lake City, Utah. During his 12 years in the industry, Jason has achieved significant success, including Top of the Table of the Million Dollar Round Table and Penn Mutual's Gold Medal Award for sales excellence in its career agency system.
Life insurance contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Consult your licensed financial representative on how specific life insurance contracts may work for you in your particular situation. Your licensed financial representative will also provide you with costs and complete details about specific life insurance contracts recommended to meet your specific needs and financial objectives.
