An article by Pamela Yellen originally published on Lifehealthpro, November 9, 2015
First off, full disclosure: I'm a financial investigator and an educator, not a licensed financial advisor. I've spent the last 25 years investigating more than 450 different financial products and strategies.
Of all of those products, my very favorite is dividend-paying whole life insurance. That's because it enjoys an unmatched combination of advantages, which include safety, guarantees, liquidity, control and tax advantages.
If you sell dividend-paying whole life, you probably hear many of the same objections to it over and over. But my research has shown these objections are based on myths and misconceptions. So here are the six biggest myths about dividend-paying whole life — and the truth about each of them.
If you don't sell the product, it may be because you have some of the same objections. Perhaps this will help open your mind...
MYTH NO. 1: DIVIDENDS ARE "JUST" A RETURN OF PREMIUM.
One of the objections you probably hear about dividend-paying whole life insurance is, "What's the big deal about dividends? They're just a return of premium the company overcharged you."
Recall that dividends are paid when the company's income less its expenses exceeds its projected worst-case scenario. Technically, the IRS defines dividends as a return of excess premium and therefore not taxable.
However, over time, those dividends can exceed the premium you paid in by a significant amount. If that's the result of "overcharging," I say, "Bring it on!"
MYTH NO. 2: THE COMPANY "KEEPS" YOUR CASH VALUE AND "ONLY" PAYS YOU THE DEATH BENEFIT.
The financial experts often complain that the insurance company "only pays you the death benefit and keeps your cash value" when the policy owner dies.
Technically that's true. But how do you explain this: I posted one of my dividend-paying whole life policy statements on our website. It shows how if I'd died on the date the statement was issued, my family would have received a check for $381,776, which is a few thousand dollars more than the original $250,000 death benefit and then-current total cash value ($128,361) combined.
It's amazing to me that so many people — including many experts — hold whole life insurance to a totally different standard than other financial vehicles. For example, if you have $100,000 of equity in your home and you sell it for $250,000, do you expect to end up receiving both amounts, for a total of $350,000? Of course not.
However, as I just demonstrated, a dividend-paying whole life policy can deliver that advantage.
MYTH NO. 3: THE CASH VALUE IN A WHOLE LIFE POLICY GROWS TOO SLOWLY.
Financial pundits say that your cash value grows much too slowly in a whole life policy. They claim you might not have any cash value at all in the first couple of years.
True for some whole life policies. However, more and more advisors are incorporating riders that dramatically accelerate the growth of the cash value in the policy, especially in the early years of the policy.
In fact, adding these riders to a policy maximizes both the cash value and the death benefit over time.
In addition, adding these riders allows clients to use their policy as a powerful financial management tool from day one.
MYTH NO. 4: THE COMMISSIONS IN A WHOLE LIFE POLICY ARE "TOO HIGH."
Who usually complains the loudest that whole life policies pay too much commission? Often stockbrokers and money managers. They claim that high commissions are the only reason agents sell these policies.
But the reality is that those same money managers are actually making up to ten times as much as an advisor who sells a client a super-charged policy. Let's compare: Assume you put $10,000 per year for thirty years into a super-charged dividend-paying whole life policy and the very same amount into an investment account.
According to those financial planners and experts, the agent who sold the policy would earn about $10,000 commission in the first year and a small commission each year after that.
That would be true of the policies many advisors design. But because a super-charged whole life policy will direct much of the $10,000 annual premium into the riders that make the cash value grow a lot faster, that advisor will only make between $3,000 and $5,000 in the first year, not $10,000. They'll receive a small renewal commission during the remaining years, bringing the total commission paid over thirty years to about $8,500.
Meanwhile, the planner or investment advisor who's complaining that this is way too much commission will earn a management fee every year of at least 1 percent of the account value (and often it's 1.5 percent or even 2 percent) which, if the market has moderate returns over the same thirty years, means he'll earn $100,000 - or more!
MYTH NO. 5: YOU SHOULD BUY TERM INSURANCE AND INVEST THE DIFFERENCE INSTEAD.
According to Dr. David Babbel, Professor at The Wharton School of the University of Pennsylvania...
"People don't buy term and invest the difference. They most likely rent the term, lapse it and spend the difference."
Professor Babbel is co-author of Buy Term and Invest the Difference Revisited, published in the May 2015 issue of Journal of Financial Services Professionals.
Although much lip has been given to the notion of "buy term and invest the difference," I've never met anyone who actually bought a term policy, priced the cost of a permanent policy with an equivalent death benefit, and then put the difference into an investment account every month.
It just doesn't happen.
MYTH NO. 6: ONLY WEALTHY PEOPLE CAN BENEFIT FROM WHOLE LIFE INSURANCE.
This is an urban legend that desperately needs to be put to rest. Did you know that whole life insurance was part of the financial foundation of half the U.S. population around 1900, and one-third of the population in 1950?
It was common for blue-collar and middle-class families to own these policies. There are folks who have these policies who make $20,000 or $30,000 a year, as well as those who make $300,000 to $3,000,000 per year.
Maybe our grandparents knew something we've forgotten?