Whole Life Policies Aren’t Just for Death

We were seeing between 6% and 10% increases in policy applications at the end of 2023 [from the prior year]. There are a couple of reasons for that. Some of the growth is tech-related, and some is economy-related.

It’s coming from the pandemic. During it, people got sick and lost their jobs. It increased the awareness that their wages were incredibly unstable. They realized their pension plans may or may not be portable. What they thought they had as an employee of a company—thinking it would be cradle to grave, if you will—that was now in jeopardy because they no longer had a job. So people started to look at their finances in a different way. When people look at first-order things like food and shelter, the pandemic made people highly sensitive to these things. They started looking at how to insulate against an unexpected shock to the system. And there were a few tools they looked at, the first of which was life insurance.

Really basic life insurance policies. [People] started to look more at life insurance as a way to establish that kind of security they thought they’d had from their employer. Let’s call them $50,000 policies that were designed simply to cover immediate expenses in the case of that person’s death. We are experiencing a tremendous surge in interest in applications for insurance policies designed to pay for burial expenses, because (1) they tend to be cheaper policies to purchase, and (2) you’ve got the type of sensitivity to mortality that exists now. You could pay for a $30,000 policy so your family doesn’t have to come up with the cost of the casket or services at the end of your life. That’s one of many different versions of that same concept, from burial expenses to credit life (which eliminates credit debt) to mortgage protection insurance (which offers enough life insurance proceeds to pay off the mortgage). It’s one way to insulate yourself against the system.

Companies have gotten better about underwriting and delivering an application process online that’s easier for people to get their head around. Traditionally, life insurance was underwritten on five different criteria that companies used to qualify people for an insurance policy. This was not very inclusive. But companies are getting better at data analytics. Data analytics, artificial intelligence, and machine learning can be problematic tools for underwriting risk unless the models are trained properly. But when they are, it is very, very gradually leading to more and more people eligible to buy life insurance products across the board. If you have more data and we can actually gather healthcare data properly, in real time, it leads to an easier and more robust underwriting process that could potentially invite more people into eligibility.

After the pandemic, people wanted to cover those basic interests. They got those covered and can move now to higher-order interests, which is a more sophisticated use of life insurance. That can include some portion of that asset on your balance sheet. This does just apply to some people, though. If you’re not somebody who has an investment portfolio, whole life insurance as an investment vehicle may not be for you. But if you have an investment portfolio, you should be thinking about the ways that you can augment that with life insurance.

What an insurance company is designed to do is to take $1 of your money and say, “If something happens to you, we’re going to pay you $100,000.” Then the company takes the dollar to invest, and generally the goal is to get somewhere around a 10% or 15% return on that dollar. On a broader scale, they’re going to take from a million people, and they’re going to invest that million and get a 15% return. Now they’ve made $150,000 without paying out a single dollar. That will be the ideal situation. As an investment tool, life insurance companies will offer you millions of different options to invest and get the same return the insurance company gets. They let you participate to get part of that $1, and what they are hoping is they never have to pay more than your initial investment back to you.

The type of policies that have investments are whole, universal, and variable life policies. Most of them have a cash-value premium that you pay, and a portion of that dollar will go toward building cash value over time. That value grows tax-deferred. And the policyholder can access it through low-cost loans as a source of liquidity and supplemental income, like if you get sick and can’t work. Policyholders aren’t taxed on those gains as long as the money stays in the policy.

One way is to use it as supplemental retirement income. This entire notion of retirement is now a different concept. Retirement now does not mean the same thing that it meant for the prior generation. They had three stages of life: zero to 35, 35 to 65, and retirement until death. But we don’t live that way anymore. Our research indicates that, today, midlife stretches from 35 to 80, with little diminishment of capacity or abilities, though there are more nuanced changes in how we approach midlife. A lot of our investment strategies include life insurance as a means of generating an additional source of liquidity during that time. For instance, if a policyholder wants to make withdrawals to supplement their retirement, we have to think about that differently because we’re not limited to age 75 and we’re not limited to 105. One of the benefits of having a good swath of your investment strategy within these policy vehicles is that you can access funds during your mature life as an income stream. And we’re talking about like 2% to 4% interest rates when you withdraw funds. You can’t go to a bank and borrow for less than that.

Yes, for legacy planning if you are philanthropic by nature. The cliché expression is that it’s better to give with a warm hand than a cold one. And it’s probably much more tax efficient to give when you’re living. But life insurance can also be used to leave a legacy for any institution by making a testamentary gift. That means any portion of your life insurance proceeds can go toward a donation. Someone may not be flush with cash today but could be in a position to donate later. If I wanted to leave a million dollars to Duke University, I could purchase a plan and leave them as the beneficiary. It’s a very tax-efficient and very low-cost way of donating a million dollars to a charitable institution at some point in the future. Another way is if you are a partner in a company, your life insurance can play a crucial role in providing funds for its future if something happens to you. Insurance could help fund buy-sell agreements or compensation arrangements. The life insurance policies can provide for a smooth transition of ownership and offer some real financial stability for the business’s expenses after you’re gone.

Yes, especially if you have more than the statutory limitation for estate taxation [$13.61 million for an individual and $27.22 million for a married couple]. It can be useful to plan in your death benefit for the estate tax. When you die, all of your assets receive a step-up [tax] basis, meaning if you buy a house for $100,000 and it’s worth $200,000 when you die, taxation for the $200,000 is due. You can plan, in your life insurance policy, to cover that step-up in taxes and for any other assets that might lead to a taxation burden on your estate. You can also use your death benefit as protection for your heirs. In some jurisdictions, the cash value of a life insurance policy can be protected from creditors’ claims. So if you’ve got a lot of debt on the balance sheet, you can use life insurance as a way to relieve the pressure on creditors’ claims on your estate.

They should look at the investment history of the insurance company’s general account.

I would recommend earlier in your professional career rather than later. Mortality risk and morbidity risk increase as you age, so there are significant pricing differences with the same policies if you buy at 25 or 45. If you’re a corporate employee, take advantage of all of the supplemental life insurance opportunities that show up in your benefits package. It’s simple. It’s not invasive. It doesn’t require you to talk to anybody else about your death when you’re in your 20s. But it’s an easy way to get things accomplished. It is usually offered with a benefit that is some kind of multiple of your annual salary.

A good financial advisor should have some competency in life insurance and the components of an investment strategy. As you acquire more assets, you’ll have more people looking out for your investments, so you’ll have an accountant, a financial advisor, and an estate attorney to help you with the structure that’s put around your assets. Make sure they are all talking to each other and have an understanding of how to best protect your assets. It’s never too early to think about this. When you start earning money, when you start acquiring stuff, that’s the time to start thinking about how you are going to protect that stuff.