Dispelling Common Whole Life Insurance Myths

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Life Insurance Awareness Month (LIAM) just wrapped up in September. It’s a good time to dispel some common myths around this important financial product.

Myth number one: The death benefit is only for those you leave behind An investor can take the difference between the cash value and the death benefit of a whole life insurance policy and deploy other assets to help generate a greater income stream. If you have $500,000 of cash value in your policy and a death benefit of $1 million, then your delta is $500,000. If you invest $500,000 in a balanced portfolio and withdraw 4% annually, then you generate $20,000 per year. The death benefit of the life insurance policy provides financial protection, so you can take that $500,000 and consider either amortizing it or placing it in an annuity. In an annuity, you could possibly guarantee that income for life no matter how long you live.1 While protecting those who depend on you for financial support is one of the best reasons to have life insurance, knowing that you can have more financial freedom to generate income for yourself and your family while you are living life to the fullest is a major benefit as well.

Myth number two: Whole life insurance doesn't generate a good rate of return

For most policy holders, the whole life insurance premiums versus the eventual death benefit typically reveal a strong rate of return for your family. Many people don't compare life insurance returns to the rates of return from other fixed income instruments. Instead, they compare it to real estate or equities, but those are asset classes that you would reasonably expect to generate a better rate of return because of the additional risk. Life insurance is insulated from market risk since you are guaranteed a death benefit, and the cash value of your policy increases every year as long as your premiums are paid.2 With the whole life policy, you can review the historical rates of return to determine what rate or return have you received while the cash value grows tax deferred.3