JLM Wealth Strategies: The Biggest Lie About Whole Life Insurance

Text from a potential client: I was reading that for many whole life policies you don’t get the cash value upon death, is that true?

Thankfully, this is 100% NOT TRUE! But it is true that this lie is perpetuated around the internet as gospel and people hear or read this so often that they believe it to be true.

So here’s quick explanation to put this lie to rest and this will help you understand how a Whole Life policy works.

Lets first understand a Whole Life policy operates on a contractual guaranteed basis to accomplish what you want to have happen. I’ll come back to this.

Second, let’s have a thought exercise to help in learning.

Imagine if you will that you have a retirement goal to accumulate $1,000,000. How would you do it?

Option #1: Invest

At one end of the spectrum, the riskiest way is to invest because investments entail risk of loss. While we all no doubt would like to accumulate $1,000,000 using the fewest dollars possible, investing offers no straight line to the end goal. Look at any valuation chart of your favorite index. Returns will zig zag and ride the market roller coaster. There are no guarantees of arriving at $1,000,000. Past performance be damned (if we’re being honest).

Option #2: Save

At the other end of the spectrum is the least volatile way to create a straight line to $1,000,000 and that is to simply save. To keep things simple, assume no yield on savings and no inflation. Just save and you will get there but it will require the full $1,000,000 saved on your part in order to equal the $1,000,000 target end goal. While this is the least efficient way to accumulate $1m, it is also the only “guaranteed” method.

How long it takes to reach $1 million is up to your capacity ($100 a month, $1000 a month, $10,000 a month, etc.) and your discipline level as the saver but with enough time, money, and discipline the $1,000,000 savings goal will be achieved.

There's one problem with both options though. One unknown variable with both the investing and savings option is mortality which is why I wrote “guaranteed” a couple paragraphs above. You might die prematurely before you ever reach $1,000,000. There’s no guarantee you’ll live long enough to save (or invest) enough to equal $1,000,000.

This is where Whole Life insurance comes in. In order to make certain what you want to have happen, will happen, you require insurance on your life as a hedge. Only a Whole Life can guarantee you reach your investing/savings goal, even if you’re not alive to realize it. (The main problem with Term and Universal is that you likely will outlive both because of the fatal design flaw built into those policies... increasing future premiums.)

Whole Life accomplishes an inevitable outcome at the most basic level. Think of it as a guaranteed savings vehicle with a death benefit attached. As you pay premiums (save money), you get closer to your end goal. If you pass away before reaching the end goal, the insurance company is on the hook for the difference between the cash value and the death benefit, called Net Amount At Risk. This is the insurance part of the policy.

Only with a Whole Life policy are you contractually guaranteed the premiums will equal the death benefit at your time of death, or if you live long enough, at the end of the contract (up to age 121). In layman's terms, if you save the money, you'll reach your goal no matter what.

Each year as you age you get closer to the cash value equaling the death benefit. This is called Endowment. Only a Whole Life policy is guaranteed to endow (cash value equaling the death benefit).

Here’s the major takeaway:

What people don’t realize about how Whole Life policies work is that the cash value is the present value of the future death benefit. Read that again please. Let it sink in.

For proof, look at the death benefit in the final year of any Whole Life illustration. At the bottom on the left side is the Guaranteed Ledger. Each year the Total Cash Value is increasing and getting closer to the guaranteed Total Death Benefit. Scroll down to age 121. You'll find the Cash Value now equals the Death Benefit. This is contractually guaranteed with Whole Life and every Whole Life policy operates the same way or it's not a Whole Life policy. I've lost count of how many people have a Universal policy thinking it's Whole life... (The Non-Guaranteed Ledger below on the right includes Dividends. Dividends are icing on the cake, if you will.)

When you understand that the Whole Life premiums you are paying are creating cash value and that the increasing cash values represents the present value of the death benefit, you’ll realize the insurance company can’t keep the cash value because the cash value is 100% entwined and part of the death benefit payout. Actuarial science and contract law makes this a mathematical certainty that the premium paid into the policy will accumulate internally to equal the death benefit.

What you’ve accomplished with your deliciously boring Whole Life policy is to guarantee that you will save your way to $1,000,000 via premiums (some call it “forced savings”) and if you aren’t alive to reach the goal, your beneficiary will be recipient of the $1,000,000 tax-free death benefit. It’s boring because you know with certainty this will happen. No luck, skill, or guess work required. And I'll add a Whole Life policy has been an extremely peaceful and stress-free way to organize my life.

In a nutshell, it’s a guaranteed savings vehicle with a death benefit attached.

Now repeat after me:

The life insurance company can’t keep your cash value because the cash value is part of the death benefit.