“The best way to guarantee a loss is to quit.”
~ Morgan Freeman
Not much in life is truly “guaranteed.” We can’t guarantee the weather, what other people will or won’t do, the direction of the markets, or even if we’ll be around to see tomorrow.
And even most “guarantees” have exceptions.
Your purchase is guaranteed – but only for 30 days, or unless you drop the item, get it wet, or use it in a hazardous way.
Sometimes you have to jump through hoops to claim a money-back guarantee. You may have to return the unused product or prove that you tried it before you can even request a guarantee. One skin product company only honored their guarantee if you could provide “before and after” pictures of yourself with a newspaper showing the dates at the beginning and the end of the 90-day-trial period!
So what is a guarantee worth, anyways? Plenty – if you can count on the guarantor.
Guarantees provide assurance and give buyers confidence. They reduce stress. They limit risk. And they help purchasers make decisions about who they can trust and where their money might be well spent.
Oddly enough, people put their money in a lot of places with few if any guarantees. And without guarantees, even the most trusted places to store our cash can let us down.
Mortgage bonds, previously thought of as reliable and boring, collapsed in the financial crisis, along with the housing market. Muni-bonds, typically another safe haven for money, have been disrupted by municipalities in bankruptcy. Enormous companies assumed to be stable drivers of the economy such as Enron and WorldCom collapsed with little warning, and the elite brokerage that performed so consistently turned out to be Ponzi scheme.
Some financial products do come with guarantees. Banks offer FDIC insurance, along with anemic interest rates that “guarantee” your savings will not keep pace with inflation!
Term life insurance provides a death benefit that is practically “guaranteed” not to be paid, since term policies are designed to expire before you do.
But there IS a place where your money can provide you true “lifetime guarantees.” Participating whole life insurance from a mutual life insurance company offers guarantees that should not be overlooked… especially if you’re not the type of person who likes to gamble with your dollars!
When you buy a whole life policy from a mutual life insurance company, you’re purchasing a financial product known for its guarantees:
Whole life guarantees a death benefit. Since death is a “when” and not an “if” event, we think that’s a pretty important guarantee! Term life policies can be useful, especially for young families on a budget, but they are designed to be temporary policies, not permanent life insurance. Like an appliance warranty, you’re not likely to need a term policy while it’s in force. With whole life, as long as the premiums are paid, a legacy benefit is assured.
Someone asked this week about Covid-19 exclusions. I was able to confidently say that life insurance benefits are ALWAYS paid (except in contractually specified exclusions, such as a 2-year suicide clause). Unlike Boeing or some of the airlines that cannot survive even one quarter without bailouts, life insurance companies are cash-rich! They don’t focus on quarterly profits, they invest for 100-year timelines.
A guaranteed level premium. Your premium will never go up with whole life insurance. Premium quotes for term life insurance increase dramatically as you age until a new policy becomes cost-prohibitive. Premiums can also rise on other types of permanent life insurance while a policy is in force. Always check your guarantees and ask the right questions! However, your whole life policy premium will remain the same for life, or until the policy is paid up.
Guaranteed cash value. Whole life policies have a guaranteed cash value that is net of all costs (mortality costs, company expenses, agent commissions). Additionally, that guaranteed cash value is guaranteed to rise every single year even if no dividends are paid. Your gains are locked in, and unless you withdraw from it, your cash value will only ever go up.
Cash value can be guaranteed because of the following guarantees:
A guaranteed mortality rate. This means that your cost of insurance inside the policy is pre-determined. No ugly surprises or “imploding” policies. (Read this warning about universal life policies.)
A guaranteed expense factor. Contractually, policy expenses are guaranteed not to exceed a certain amount. Gains become irrelevant if expenses are out of control!
A guaranteed minimum amount of cash value. While other types of policies may quote higher interest rates, the truth is that a higher interest rate is irrelevant if a policy is designed to be underfunded, leaving virtually no cash value to earn interest with! With a whole life policy, you are guaranteed a minimum amount of cash value that is net of all costs.
Whole life policies also guarantee cash value will increase each and every year. Your cash value will not “roller coaster ride” with stocks, interest rates, real estate prices or politics, and your savings are guaranteed to grow even during market crashes.
You will see a minimum guarantee on an illustration, however, whole life policies consistently outperform guarantees because of dividends, which are reliable but not guaranteed.
So if you’re hoping for more than the minimum cash value guarantee, you’ll love this next guarantee…
A guarantee of participation in any profits of the mutual company. Premiums are used to pay claims, cover operating expenses and policy costs, and fund required reserves. Profits over and above legacy benefits and operating expenses are distributed back to policyholders in the form of dividends. This is because mutual insurance companies are “by definition… owned entirely by their policyholders,” according to the National Association of Insurance Commissioners, and “profits earned are returned to policyholders….”
Dividends have historically improved the returns of whole life policies, sometimes significantly. Dividends have been paid by major mutual life insurance companies every year for well over 100 years through every economy imaginable. Whole life dividends were paid even through the Great Depression, the Great Recession, every world war and every stock market crash. That’s how predictable they are!
By purchasing Paid-Up Additions with dividends received, policyholders can increase both their cash value and the amount of the death benefit. Through PUAs, dividends become part of the guaranteed cash value, which is guaranteed to rise every year.
Is it possible that mutual insurance companies may one day find themselves unable to pay dividends? Of course, it’s possible, even if unlikely. And if a company didn’t pay dividends for a year or two, if you have reinvested previous dividends in the policy using PUAs, the dividends received in prior years are now part your guaranteed cash value, raising your cash value “floor” and earning even more dividends!
Your ability to borrow against your policy’s cash value is guaranteed. Typically you can borrow an amount equal to 90 or 95% of your cash value from the insurance company. And you won’t ever have to justify your reason for borrowing or prove your “creditworthiness” to do so.
Customized whole life guarantees. Depending on which riders are chosen, you can also be guaranteed:
- the ability to purchase more insurance in the future, regardless of health,
- premiums to be paid for you in the event of disability, typically until age 60 or 65,
- access to a portion of your death benefit for long-term care, if needed, and
- the ability to accelerate your death benefit in the case of a terminal illness.
Are guarantees right for you? You don’t need to ask your doctor, just take the quick true/false quiz below:
T/F You understand the importance of having safe, liquid savings in addition to investments.
T/F You want a good, safe place to store cash where you can earn much more than the banks are paying.
T/F If you could easily leverage more cash, you could capitalize on more opportunities.
T/F You enjoy sleeping at night and don’t want to leave your financial future to chance.
T/F When you pass away, you want to leave a legacy (or an additional legacy) to loved ones and/or special causes you care about.
If you answered “True” to four or more of the questions, we guarantee you’ll appreciate the guarantees of whole life insurance!
To find out more about how whole life can be used as a superior replacement for other cash equivalents, we recommend signing up for Partners for Prosperity’s complimentary Prosperity Accelerator Pack and reading our recent ebook that is a part of the pack, Financial Planning Has Failed. You may also wish to read Live Your Life Insurance, which explains how to use whole life insurance strategically so that YOU benefit from your own life insurance.
To find out what whole life guarantees can do for you… simply contact us for a no-obligation illustration. We’ll need to know your age, your state of residence, and anything you think we should know (such as health challenges), and we will provide you with an illustration as well as additional information. And if you have questions… we have answers!
By Kim Butler and Kate Phillips