Myths of Whole Life Insurance

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There are many myths about life insurance that most people unfortunately consider as facts. Most of these myths are perpetrated by Wall Street and people who want every nickel of your money in the market under their management. The first huge myth is “buy term and invest the difference” and this one is so big it required its own article to debunk.

Myth #2

Life insurance is a lousy place to put money

What I described in previous articles about designing policies is very true but there are also some other facts that blow this myth away. Simply ask yourself this question, if putting money into life insurance contracts is such a lousy place to put money, why do the biggest and most wealthy institutions put loads of their own money into life insurance products? Major Banks, large corporations, and family dynasties have been putting boat loads of money inside these kinds of policies for generations. Are they that stupid about money? Not hardly. They are very savvy with money which is why they use life insurance contracts and other products to grow and protect their wealth.

Major Banks High Cash Value Life Insurance
As of 12/31/2014, Federal Financial Institutions Examinations Council Call Reports

JPMorgan Chase 10.6 Billion Dollars
Wells Fargo Bank 17.995 Billion Dollars
Bank of America 20.794 Billion Dollars
PNC Bank 7.699 Billion Dollars

Whole life insurance is too expensive

When someone tells me that I will simply say “in relationship to what?” If you are just comparing it to premiums for a term policy on the same coverage amount you are correct. However, because of the tax free guaranteed compounding of a proper life policy many of my clients will overcome the actual cost of the insurance in the first few years of the policy. These policies will get to the point where they self complete which means the insurance company owes you more than you owe them in minimum premiums. So if you decided to, you could have the basic premium paid out of cash value and your cash value will still grow and move forward. So when 20 years from now you still want coverage and go to extend your old term insurance policy or buy another one, get ready for the shock of the new premium based on your attained age. If you had strongly funded a life policy 20 years before, that policy’s death benefit would have been growing these last 20 years (all part of proper design of the policy with a proper carrier) and no more funds would be required to maintain the policy due to the huge cash values you have accrued. You would have also have had access to large cash values to use for other wealth strategies.

Myth #4

Universal life or Indexed Universal life does the same thing as Whole Life

This is such a myth that I will need more than the space allotted to let you know how these policies really work over time and why the cost of insurance will skyrocket over the life of the policy. Please download my free report at my website and find the indexed universal life report under the video. Don’t you dare buy one of these policies until you read this free report. If you already have one of these policies get the report and be thankful there is probably something we can do for you to help. Ask us about a 1035 exchange of that kind of a policy to one that is better suited for long term and being your own bank.

Myth #5

I am too old or in too bad of health to obtain a life insurance policy

I have clients all over the country who once believed this to be true but now own life insurance policies. If you like the concepts of self banking and insurance policies don’t assume you can’t qualify for one of these policies. You may be able to qualify and the numbers will still make sense. If you indeed can’t qualify yourself there are other options.

Many of my clients take out policies on their children or grandchildren which mean the younger, healthier person qualifies for the insurance but my client owns the policy with all the benefits. I have clients in their 70’s who took out new policies but put the policy on their adult children. They then went on to use the funds in the policy as their own bank. Contact us to see if this might be an option for your situation as well.

When I am speaking to a crowd on this topic I often call a properly designed whole life policy as the “one account” because it is so truly unique and powerful. It is the only account that I am aware of that can function with many different uses that all work together. This is the only account that can be:

Savings Account– When you are not using your money it is sitting inside of the life insurance contract collecting much more in interest than it would if it was sitting in a bank. As of this writing most savings accounts are paying 0.5% or less and some life carriers dividend scale is almost 6.5% on life policies. Even after you take out the cost of insurance in the early years of the policy your money still does far better than dying a slow death in a traditional bank. You have easy access to your funds just like a savings account so why keep most of your money in the bank doing nothing for you or your family?

Your Personal Bank– Just as described in the last chapter you can put these funds to use to plug up your 4 massive wealth drains and help you grow wealth as the bank. Because you are doing this inside of your life insurance contract your earnings are tax deferred inside the policy and when properly done can be accessed tax free. Also with some policies and carriers the money you borrow out will still be credited with growth and dividends. This is not common but there are carriers that allow this and we can help you determining which carrier is best for your needs

Retirement Account- There will come a time when you desire to pull an income stream out of your policy. You will be able to either withdraw the money as you see fit (not optimal most of the time) or take policy loans that you will not pay back. In most cases policy loans are optimal because you don’t have to pay taxes on policy loans. If you choose, you don’t have to pay the policy loans back during your lifetime. The loans can be paid back out of the death benefit after you pass away. For instance you have a $1,000,000 death benefit but have borrowed out $250,000 in policy loans and deferred interest and you pass away, your family will receive the $1,000,000 death benefit less any outstanding policy loans which in this case are $250,000. This will produce $750,000 tax free to your estate after you pass away.

Rainy Day Fund- You should never borrow all the cash value out of your policy but rather keep a chunk of money in the policy in case of emergency. This is a rainy day fund that produces solid interest rates and return.

Estate Creator- Let’s not forget you are creating all this wealth inside of a life insurance contract which will automatically leave behind money for your family and/or anyone else you choose after you pass away. My mom, as she aged, started to worry more about leaving money behind for her family instead of living as abundant of a life as she should have lead. This is the only kind of program where you can spend every nickel during your lifetime and still leave behind extra for your family. Wherever you have your money saved or invested currently, ask yourself if the account you have it in has all of the benefits listed below. These are all benefits of a properly designed life insurance contract. Please feel free to contact us if you need more information.

The Myth of “Average Rate of Return”

We are told that stocks are the way to wealth and that the market has averaged (pick a figure) over the last (pick a time frame) and so it will continue to do the same. It is important for you to understand that “average rates of return” can be easily manipulated and that whatever figure you get from Wall Street does not mean that your money will average that growth rate. (Dow Jones Industrial Average Stock Market Historical Graph)

Remember this example well: over 4 years, how is it possible to invest $100,000 on year one and average a 25% rate of return for four years and have less than $100,000 after year four and have never taken a dime out of the account during that time? The answer is so easy once you understand how this works. Invest $100,000 into the account and it grows at 100% (doubles) in year one so now it is worth $200,000. Year two, the account falls by 50% (half) putting the value back down at $100,000. Year three, the account grows by another 100% and the money is back up to $200,000. Year four, the account dips back down another 50% and our money is now back to $100,000. Now you take out taxes you made on the good years (the way mutual fund taxes work is you can owe tax even though you have not sold the asset) and fees, and time value of money and your account is worth quite a bit less than the $100,000 you started your investment plan out with four years before.

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Now take a look at your “average rate of return” and you will notice that if you add up 100% return years twice and subtract out your 50% years twice, that leaves you with 100%. You must divide that by the 4-year cycle and what do you get? Of course, I am a high school failure and college dropout but it looks like a 25% “average rate of return.” Did your money grow by 25% a year? Not hardly! If your money would have grown at 25% a year compounded annually your $100,000 would now be over $269,000. This is a far cry from the $80,000 your probably have left in your account when you “averaged” 25% per year for four years. Most of your 401k’s are earning an average rate of return.

Be very careful to focus on growth, not rates of return. If I am selling some kind of financial product and don’t like the last 4 year average I might try to show you the 8 year average. If that still stinks maybe the 15 year average will work? I have seen people in this day and age pull out 100 year averages to attempt to prove their point. The only problem is the economy of today doesn’t even vaguely resemble the economy of last century. This means that a 100 year average is probably a lousy way to try and predict the growth for the next 10 or 20 years of any particular product.

Instead of average rate of return focus on cash flow in and cash flow out of your accounts. Don’t get sucked into the age-old trap of just thinking about rates of return. Many times they are put in place so you will take your eye off the ball of what’s really happening. What’s really happening is that while we are all focusing on rates of return and the rise and fall of the stock market, we are happily pouring our wealth out month after month to the banks and other places with no real plan to stop the insanity. Wealth without Stocks will give you that plan.

Visit us at Perpetual Wealth Systems to learn more.