1 Debunking The Myths About Whole Life Insurance: Taking a Fresh Look at a Time-Tested Product
2 The economic downturn forced many Americans to rethink the way they plan for their financial future. In today s more fiscally conservative environment, a growing number of consumers are returning to a financial product whose value was recognized by their grandparents: whole life insurance. Whole life insurance provides a broad range of financial benefits, and has proved its long-term value over generations. While other financial instruments faltered during the recent Great Recession, whole life insurance provided small business owners with a much-needed source of funds and retirees with access to additional income all the while building guaranteed reserves, declaring dividends, and paying death benefits to beneficiaries. For the last two decades, financial pundits and journalists have discounted the benefits of whole life insurance in favor of trendy, equity-oriented vehicles that seemed to offer higher returns at lower costs, but in fact were high risk. Throughout this time, a number of myths about whole life insurance have been portrayed, with the result being that many Americans are unaware of the truth the benefits that make whole life insurance one of the most valuable and flexible financial planning tools available.
3 Myth #1: You only benefit from whole life when you die. Facts: That s really wrong! Participating whole life policy owners enjoy substantial living benefits during their lifetime of coverage: Participating (or par ) insurance company policy owners generally receive annual dividends after the first policy year. That s because there are no outside shareholders in a mutual ( par ) life insurance company. For example, Guardian declared a total dividend of $795 million to be paid out to policy owners at the end of 2012, and has paid dividends on whole life policies every year since A 25-year Guardian policy begun in 1986 and tracked through 2010 provided a 5.19% historic cash-on-cash return, along with strong guarantees and low volatility. Keep in mind that past performance does not indicate future results. Dividends can be used to fund policy premiums or to buy more permanent increments of death benefit and cash value. Access to the policy s cash value is typically available through withdrawals and tax-free loans. 2 Alternatively, the cash value of the policy can be pledged as collateral for a tax-free loan. Small business owners may borrow against their policies to provide working capital. Wealthy individuals use whole life in their estate planning by setting up an insurance trust to pay estate taxes from the proceeds of the policy. 3 Retirees who own permanent life insurance can look to generate more cash flow from their other assets because of the certainty and inevitability that the ultimate death benefit will deliver to their heirs. They may choose to elect higherpaying annuities or spend-down their other retirement assets rather than living only on current yield. Myth #2: Whole life is a lousy place to put your money. Facts: Um, no... The value of a whole life insurance policy is uncorrelated to the stock market and is largely guaranteed by the insurer, so that neither death benefits nor cash values are affected by declining markets. Therefore, a whole life policy can serve as the stable component of an overall financial plan. The accumulated value in whole life insurance grows taxdeferred. Accumulated values on a policy may be withdrawn tax-free, up to the cost basis. Any withdrawal in excess of cost basis is taxed (this assumes the policy is not a Modified Endowment Contract, which has different tax implications), but policy loans in excess of basis are not taxed under current tax law. 2, 3 You purchase whole life insurance to protect your family in the event of your death. However, it s much more than that. It s actually one of the most valuable assets in your financial portfolio. A whole life insurance policy has a real return that performs competitively within other high-quality, fixedreturn assets. And, depending on how you use it, it can end up being two assets and two returns a living asset with tax-advantaged distributions and an income-tax-free and potentially estate-tax-free death benefit. Plus, these returns are not impacted by market volatility like most other assets. In the long term, par whole life represents consistency without the down years. Is it time to optimize your financial portfolio? 1 Dividends are not guaranteed. They are declared annually by Guardian s Board of Directors. 2 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. 3 Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
4 Myth #3: Once you retire, you should cash in your life insurance policy. Facts: We hope not! Retirement is no longer the appropriate time to drop life insurance today it s the time when many people realize the importance of buying it! Through the loans and withdrawals available to whole life policyowners, an individual can supplement retirement 2, 3, 4 income with tax-free funds. Continuing whole life as part of a financial plan provides an additional level of security, financial freedom and a legacy for loved ones, even if other assets are used for retirement. Many people have estate liquidity problems that can only be solved through the availability of immediate cash. Heirs can use the proceeds of a whole life policy to pay estate taxes. 3 Whole life also provides a good source of tax-free funds for big-ticket items that could put a dent in a tight retirement budget such as a grandchild s college tuition or wedding. Some families may want to establish special needs trusts to provide financial care for family members with health issues, and life insurance is ideal for that purpose. Families with real estate, closely held businesses, leveraged investments or margined stock portfolios to name just a few categories often use life insurance to offset the significant cash liquidity demands on their estates. Today s healthy Baby Boomer couples have, on average, as much as a 30-year life expectancy (for at least one spouse) past an age-65 retirement. Whole life can offer you the luxury of being able to spend down other assets first, since you would already have in place a financial foundation for the next generation the legacy is secure. Myth #4: Whole life is too expensive. Facts: In considering whether to pur chase whole life or to buy term and invest the rest, you must take into ac count not just the premium cost, but also the length of time you want coverage and your ability to invest the rest profitably. Term insurance isn t designed for lifetime coverage. In fact, term insurance is prohibitively expensive to maintain for the average U.S. life expectancy of 78.9 years never mind to age 100. Term costs can average a staggering $700,000 per $1 million of death benefit, and more than $4,000,000, to age 100 for a $1 million policy. 5 For longer periods an entire lifetime whole life insurance is substantially less costly than a lifetime of premiums paid for term. If the well-defined needs for life insurance will not exceed 30 years, a term insurance policy will often be cheaper. While term life is typically affordable during the primary premium guarantee period (5 to 30 years), annual premiums quickly escalate to an unaffordable level once the guarantee period ends. With term insurance, the policyholder does not accumulate any lasting cash value. At the expiration of the term of the insurance, the policyholder owns nothing, in contrast to whole life insurance, where premiums build cash value that belongs to the policyowner. Whole life insurance provides a disciplined means of accumulating cash values that are guaranteed (with respect to the base policy) and subject to the declaration of dividends for that complementary portion of a long-term policy s projected values. To achieve returns equivalent to those of a Guardian whole life policy in a 25-year policy study from , an individual investor would have to achieve returns in the apocryphal difference fund of at least 10% before-tax each and every year over a long period of time of premiums paid a feat requiring serious investment acumen, as well as discipline and luck. Whole life insurance has flexibility in how you initially structure the contract. Whether you structure around long-term premiums or blending in term within the same policy, you may get a product premium that is competitive with an extended level-term product, while creating the potential for long-term increases in death benefit. So-called Lifetime Term policies are also available generally called Secondary Guarantee Universal Life. Skipped or late premiums may void the guarantee of coverage and there is usually little or no cash value available for emergencies, for retirement cash flow, or for transferring to any other product if you so desire. Many consumers purchase Lifetime Term without realizing that today s $1 million death benefit will depreciate in the future. For example, 30 years from now $1 million will have the approximate buying power of just $400,000 today. 40 years from now, the buying power will drop to just around $300,000 only 30% of its initial value. 5 4 Assumes the policy is not a Modified Endowment Contract (MEC). 5 Source: Richard M. Weber, MBA, CLU, AEP; and Chris Hause, FSA, MAAA, CLU; Life Insurance as an Asset Class: Managing a Valuable Asset.
5 Myth #5: All life insurance is created equal. Facts: That just isn t the case. The safety and security of your whole life policy depend on the insurer from whom you acquire it. That s why it makes sense to buy whole life from a well-established mutual carrier that has decades of experience in the industry and maintains a high credit rating. Mutuality forms the cornerstone of everything we do at Guardian, empowering us to do the right thing for the people who put their trust in us. As a mutual company, the interests of our policyholders guide our decisions, from our strong emphasis on values to our focus on long-term financial strength. Unlike publicly held companies, we have no stockholders and therefore no conflicts between the short-term, quarter-to-quarter financial demands of Wall Street and the long-term interests of our policyholders. Because our customers are also our owners, we serve their best interests by delivering high-quality, low-net-cost life insurance with the greatest degree of financial strength 6 possible. Guardian is among the top tier of all life insurers. For example, as one of the four major mutual insurers, Guardian has a COMDEX of 99 on a scale that tops out at 100 (as of April 2012). A COMDEX is an arithmetical compilation of the four major rating agencies ratings for which a COMDEX of 90 is considered reasonably safe and 95 is extremely safe. 5 One of the reasons why mutual companies are so highly rated is because they typically invest a high percentage of portfolio assets in safe-haven government-guaranteed investments and other high-quality, fixed-return instruments. In comparison to stock companies quarterly earnings pressure, mutual companies can take a long-term investment and management view. Whole life insurance policies can be customized with a variety of riders or special features, such as a guaranteed insurability rider or an accelerated benefit rider, that match an individual s financial goals and protect from different risks. In fact, some of these riders can offer the existing client or even their children guaranteed insurability in the future, regardless of how their health may change over the years. 7 6 Financial information concerning The Guardian Life Insurance Company of America as of December 31, 2011 on a statutory basis: Admitted Assets = $35.1 Billion; Liabilities = $30.5 Billion (including $26.8 Billion of Reserves); and Surplus = $4.6 Billion. 7 Riders may incur an additional cost. Myth #6: Once you buy life insurance, you don t have to think about it again. Facts: Sticking the policy in the bottom of your file cabinet and never thinking about it again isn t the best way to approach your life insurance purchase. Leave the set it and forget it tag line to infomercials sit down with your financial professionals at least on a biannual basis to review your situation. Economic realities can affect your policy s cash values. Just as you periodically review your other asset classes to check their performance, you need to review this one as well. Gain reassurance that your life insurance portfolio continues to meet your needs. Life happens. Make sure your policy still fits. Whole life is generally designed with the built-in flexibility to make modifications. New family member? New career? New windfall? Performing due diligence is also critical: Sometimes, reviewing your policy can result in a reduction in your premium. Positive health changes can sometimes lower premiums on policies you already own. Policies with loans and withdrawals, if not managed, may jeopardize some long-term policy provisions or guarantees. Policies held in trusts need review, too. Just because a policy is out of your estate doesn t mean it should be out of your mind! Performing policy maintenance can help link your advisors together, strengthening their relationships around you. Crosscheck ideas between your investment, tax, estate, and insurance advisors. Of course, if you purchased term insurance, discuss your options soon! When the term period runs out, premiums will escalate and conversion may be a viable option.
6 Pub 4621 (05/12) The Guardian Life Insurance Company of America 7 Hanover Square New York, NY
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