I have spent more than 20 years on Wall Street and I was lucky enough to meet smart people who knew how to maximize their assets. You know, on Wall Street, smart people become rich, so if you’re smart enough, you stick to those people. So I was speaking to my old boss the other day and I asked him about the trend on the stock market and what he was buying. To my surprise, he told me that he hadn’t bought a stock in 10 years.
I was stunned; Everybody on Wall Street has a few favored stocks that they love to
What’s this? Everybody on Wall Street has a couple of favorite stocks that they would always brag about. So the question was he putting his money? “Whole life insurance” was his answer.
So after an hour he had me completely riveted on the concept. He had research the topic thoroughly and examined its entire constituent so assiduously, that I knew that this was the perfect way to maximize my income. This is the smartest way for wealthy people to get wealthier. Why? Because this policy gives them the opportunity to take advantage of built-in savings options, tax advantages and dividends.
What Is Whole Life Insurance?
Whole life is a type of life insurance contract that provides insurance coverage for the insured for his or her whole life. Upon the fated death of the insured, the insurance payout is made to the inheritor of the contract. These schemes also comprises of a savings component, which amasses a cash value. This cash value is one of the pivotal elements of whole life insurance.
Similarities & Differences to Term Life Insurance
Similarly to term life insurance, whole life insurance policy comprises of inheritors too. They are the one who receive the death benefit when the insured dies.
The biggest difference among those two insurance policy, at least superficially, is cost. Some whole life insurance premiums cost three to five time as much as term life premiums, at least at the beginning. However, term life insurance last only for a prescribed period, usually ten or twenty years, before the policy expires. In term life insurance, the younger and healthier you are, the lower the cost of your insurance. When the term expires, you can renew the policy at a much higher premium in most cases, depending on the age and health of the insured. Whole life insurance premiums, on the other hand, while costing more at the beginning, never has its cost go up – this is key. The policy is fashioned to last your entire life, and as long as you’re paying the premiums, the policy will be valid regardless of your age and health.
The premiums in whole life policies are based on a cash value as well as a death benefit – term life insurance offers only a death benefit.
Are the Higher Premiums Worth the Cost?
In a word, yes.
The first major advantage of whole life insurance is the fact that the cost of the premiums paid to the policy never rises, as long as you make sure to pay the premiums and the policy doesn’t become void. This is the main advantage whole life insurance offers over term policies, in which your rates rise over time. Term policies costs rise due to the changes in your health and age. As you get older, your chances of dying increase. As the life insurance company undertake that risk, they rise the cost of premiums.
However, with whole life insurance, the premium cost doesn’t change as long as the policy is valid. The cost will remain the same independent of how healthy you are. This is guaranteed as long as you pay your premiums. As a matter of fact, as the years go by, the policy becomes cheaper. This is because of inflation, which grinds down the value of money. With a premium that never changes and on which inflation has a positive impact, you are literally paying for the policy with "cheaper dollars." On the other hand, the cost of term life polices is only assure until the end of the term which usually last five, ten or twenty years, after which term policy premiums can be increased accordingly to your age, health and also according to the rate of inflation.
Cash Value, Taxes, and Dividends
Another advantage whole life policies offer is that the premiums paid contribute to increase your cash value and if you’re disposed to pay more, it will increase the death benefit. Also, you cash value earns interest is similar to a savings account.
It is important to note that, with a whole life insurance policy, you cash value and death benefit can never depreciate in value, unless you start withdrawing the cash value from the policy, or unless you stop paying your premiums, which would void your policy. In this way, your whole life policy almost identical to a savings account: When you pay your premium, part of the money is directed to the insurance costs, while the rest increases your cash value. This cash value earns interest, guaranteed by the insurance company, just like the death benefit. The guarantee is secured as the company that holds your policy, so financial stability is a mainspring in choosing an insurance company.
Tax Advantages
When you invest into your 401k or traditional IRA, you are only delaying taxes that you will inevitably have to pay when you withdraw your money during retirement. With a whole life insurance policy, premiums are paid with after-tax dollars. The cash value multiplies without taxation. You would only be taxed if your withdrawals from the policy are more than what you put invested, and you can remove gains tax-free by taking a loan off the policy.
Dividends
The whole life policy pays a dividend. The main advantage is that these dividends are not taxable, but are considered returns of premium. So, if the insurance company pays out $1,000 in dividends on your policy, at the end of the year, you don’t pay taxes on that money. You are given the opportunity to take that money in the form of a check, reinvest it in the cash value of the policy, or use the dollars to purchase supplementary, paid-up insurance. Those dollars you put in new policies will buy more life insurance, provide a outstanding death benefit, and earn interest.
Borrowing Against Your Policy
It is possible to take loan off the cash value of your whole life insurance policy. For example, if you ever need some money, perhaps to help pay for a child’s education, you can take a loan from the cash value of the policy. Interest to the insurance company is applicable on this loan, but the loan rates are very competitive with standard bank rates on home equity lines. In most cases, the loan balance can be reimburse at the time of death by subtracting it from the death benefit.
Also, there’s the potential for tax-free income. Loans off the policy allows you to take money out of the policy tax-free. Though interest will be paid on the loan, depending on your income tax bracket, it can be considerably lower than what you’d pay in taxes. This also gives individuals younger than 59 1/2 the opportunity to access income for an early retirement without having to pay excessive taxes and penalties.
Lastly, and particularly alluring to the very wealthy, is the fact that in some states, all or most of the money in a whole life policy is free from from creditors. In these states, if you are ever sued, that money is viewed as secured because it is meant to profit to someone else: the beneficiary.
The Strength of the Insurance Company
Since your association with the insurance company will literally last a lifetime, whole life insurance policies are really a long-term investment. Opting for a company with the highest ratings both for financial stability and customer service is crucial. Do your research and confirm that you feel comfortable with your insurance broker. Remember, the guarantees offered in whole life policies are only as strong as the companies who offer them.
Here’s a list of the highest rated overall insurance companies according to ConsumerSearch.com are as follows:
Disadvantages of Whole Life Insurance
While there are many benefits to whole life insurance, there are also some limitations to consider:
The cash value of a whole life insurance policy will not start to rise until two to three years of frequent premium payments.
Whole life cost a lot more than other types of life insurance, such as term life. Make sure that the cash value and durability of the insurance policy justify the exorbitant premiums relative to a term policy with the same death benefit.
Whole life policies can be extremely complicated and there are subtle differences between policies. Careful research, a solid relationship with the insurance agent, and a clear-cut understanding of your insurance needs and priorities are crucial to getting the right policy
Whole life policies have a “surrender period”: A length of time that you must keep your money with the insurance company before you are allowed to withdraw it. If you want to withdraw it before the end of the surrender period, you have to pay a surrender charge, usually around 10% of the account value. A surrender period is usually 5 to 10 years, but make sure to read the policy carefully to ensure that you understand how long this period is on your particular policy.
Loans are not immediately available. Most policies have a minimum cash balance (typically at least $10,000) and a period of time you must be an owner of the policy (typically five years or more) before you can borrow against the policy. Once you have reached these milestones, you can typically borrow up to 75% of the cash value.
Final Word
The most important thing to consider when deciding whether whole life insurance is what you need is to ask yourself why you are buying insurance. To put it briefly, if you have a long-term insurance need and you want to boost your retirement savings and long-term financial flexibility, a whole life policy is a great product.
The key to whole life insurance is to draft exactly what your overall financial picture is before taking a decision. Once you have decided to invest in whole life, commit to it and understand its benefits and limitations so you can make the most of the policy offered and achieve your financial goals. Consulting a financial professional who is aware of all of your needs and concerns might help you make a decision.
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