Life insurance can go a long way for your wealth building

I was asked to provide an illustration for the WL policy I like (see below) and this has generated many interesting questions, such as if this is only suitable for people having a lot of free cash, is it worth to pay the high premium for so long and whether one should only believe the guaranteed projection but not the non-guaranteed projection. Let me offer some foods for thoughts here but my previous blog has already provided a lot relevant information.  The example below is for a 26 years old person paying an annual premium of $50K and the base death benefit (DB) is $3.7 million.

First of all, this example is just an illustration for a particular person but the principles and returns will be the same regardless the amount of the annual premium. Even if you just buy a policy with a $5K annual premium, the percentage increases over time will be the same, you will still start to turn all the premium into cash value (CV) starting from year 3 and break even by year 6. So this type of life insurance (LI) is suitable for everyone, not just those with a lot of free cash! Regarding the question how long to pay the premium, first of all, except the term life, all other LI should be treated as a long term commitment. No one should buy a LI expecting it is only for a short term deal. Find a comfortable amount based on your projected future income and go within your comfortable zone. DON’T STRECH! Having said that, this type of LI has a 70-80% range of flexibility for the annual premium. In this example, this person’s base premium is only about $9K per year, which is the minimum to pay to avoid a policy lapse. The other $40K is flexible and you don’t need to pay if you are short of cash for a year. But paying it is actually greatly benefiting for you because this flexible amount can really generate a lot of CV for you. Also, due to the high CV amount accumulated with such a policy, one can easily use the CV to pay down premium if chosen to do so.  

Now regarding the question whether it is worthy to pay so much premium for so many years, here comes in the mindset aspect that differentiates among people regarding how they manage and grow their wealth. As I have said many times before (but rarely people get the real point, too bad!!), this is not a traditional Whole Life (WL) and the main purpose for it is NOT for the DB. Rather this is a high yield saving type of policy for growing CV as the main purpose. In other words, with this policy, one wants to minimize the DB (which is only a side benefit) but maximize the CV and accordingly the cost for the policy is cut down substantially (e.g. 70-80% less) in comparing to the traditional WL. Only if you can understand this and change your mindset, you can then easily understand why it is a great thing for people to pay as much money as possible and for as long as possible into it, because this becomes virtually a saving account than a LI. As I have already demonstrated before with my own policy experience,  the CV is very liquid for use for any purposes and you can simply treat it as a line of credit for yourself but without paying the interest! I have a lot bigger policies in place and I’m happily paying into it for years by knowing this is a big trunk of cash pile that I can accumulate and use as tax-free money when I go into 70-80s. At the same time, my family is well protected in case something tragic happens, or I need LTC and then my heirs will get all the money leftover tax-free when I’m gone. This is the real thought process and mindset I have for this type of LI although I know very few people including agents can understand it! I often heard people saying life insurance is only for life protection (DB) and should not be mixed with investment and wealth growth. I’m fine if this is your personal choice but I will only laugh if this is considered as a norm for everyone. Regardless you believe or not, buying a LI is an investment as you basically ask the insurance company to invest for you largely in the bond market. And for those more savvy and open-minded people, a properly structured LI can generate a lot of liquid money asset that can be used for any purpose during our life and TAX-FREE! Is it not the ultimate purpose of investment? Definitely yes at least for me!

Finally regarding the question which return you should consider: guaranteed part or the non-guaranteed part. This is really an interesting point that people can easily be confused about. It is very often you hear an agent telling you to believe that IUL (the most hotly promoted product) can generate 8-10% returns based on the historical market performance. And for WL, you should not believe the non-guaranteed part but only look at the guaranteed portion. Really? If we follow this logic, no one should buy any LI except WL actually! My argument is simple: I only know WL has a guaranteed return, not other IL products. For IUL, the 8-10% return is only a projection that is hugely impacted by the stock market and therefore cannot be guaranteed at all. The only guarantee IUL offers is that its premium will for sure increase with age. So if you are only interested or believe in a guaranteed return, buy WL, not IUL or VUL etc. Let me be clear, I’m not against IUL/VUL as they are suitable for some people but definitely not for me due to their uncertainty. It is purely a personal choice! So how should we look at the non-guaranteed return in a WL?  Indeed I cannot guarantee you anything beyond what the company can guarantee. But if you have a good quality company with a long track record of business performance, then very reasonably you can expect the non-guaranteed portion is quite a real return you should take into consideration. Using PennMutual (PM) as an example, they currently offer 4% guaranteed return plus !% floating dividend. So the question comes down if we can believe the 1% dividend that is added into the non-guaranteed projection. If you ask me and you also believe I do have some financial sense, then I can tell you I strongly believe it for two reasons: For one, PM has paid dividends since its inception over 160 years ago and has never missed it. This is the company that has gone through all kinds of challenges but has never let its partners (the policy holders) down in the past 1.5 century. Why should I doubt it now when it is still performing well with their very conservative approach? Then, it is my personal opinion only but I think the bond market is moving into an era in which insurance companies may greatly benefit. Good insurance companies invest most of the money in bonds for safety and the past decade has been very challenging for them as the bond yields have come down relentlessly to its historically low. That’s why many insurance companies are struggling and the dividends have also come down along with the trend. But I think it is very likely the bond yield has reached its bottom and start to enter into a higher yield era. For the bond market, its trend usually lasts 2-3 decades. It has been bear market for bond yields in the last 30 years. If indeed it starts to go up, likely it will go up for 2-3 decades as well. This will be great for insurance companies. Looking at the history for PM, it actually paid up to 10% dividends during the time the bond yields reached its top. For those with mortgage held over 20 years, you must know how high the mortgage rate was 10-20 years ago. Just a side note, higher  bond and mortgage rates will be coming back in the years ahead. That’s why personally I actually think this is the great time to have WL type insurance that pays dividends as likely the dividend yield will go up, not down and it is a much safer bet than the IUL stock market based projection. As I explained in the previous blog, I think the chance is higher that we may move into a long-lasting bear stock market in the next 5-10 years.