November 2016

Permanent Life Insurance – the Utility Player of Holistic Financial Wellness

It was 1979. I had just graduated college and was working as an actuarial student at Connecticut General Life Insurance (“CG”) when I met my first Life Insurance salesman. John Greer was not a colleague or a workshop leader assigned to teach me the actuarial intricacies of any particular CG product. Rather he was a Northwestern Mutual Life sales agent barely out of college himself attempting to sell me (a single 23 year old guy) permanent life insurance! How he came up with the idea to infiltrate another insurance company (CG had its own line of policies) in order to sell insurance to actuarial students, I will never know, but clearly John ( was, and still is an “out of the box” thinker who is well worth knowing.

The fact is that John closed that sale and I went on, over the next 20 years, to buy 4 more policies from him, all of which I still own today. This may say something about John and his ability to sell, but I think, even more importantly, it says something about the power and versatility of what is perhaps one of the actuarial profession’s greatest inventions and an important contribution to Society. I’m talking about the humble Life Insurance Policy. The concept of life insurance goes back to Roman times, but the life insurance policy as we know it today was created by UK actuaries at the Equitable Life Assurance Society in 1762, (a company that flourished for over 200 years until it was undone in the early 2000’s by straying into the dangerous waters of guaranteeing the seemingly safe interest rate of 7% on almost $10 billion of annuity liability).

Despite being owned by vast numbers of individuals and organizations, Life Insurance is almost certainly the least understood  of the “standard” financial instruments that individuals and organizations (private, public and not-for-profit) use in the financial management of their enterprises. More importantly, it can also be a critical component of any individual’s plan to achieve holistic financial wellness. The reason for this is simple. Over time a life insurance policy can perform many different interrelated functions that will help ensure your financial wellness. These include capital accumulation, tax minimization, family protection, estate planning and even cash flow management. It may not be the best at any particular function, but like a great utility player on a baseball team, life insurance can be used for different roles at different times in your life and is always a good resource to have on your bench when a particular need arises. In short, Life Insurance is like Ken Zobrist of the Chicago Cubs; maybe not a candidate for MVP, but a valuable player nonetheless who richly deserves a spot on your roster.

The history of life insurance and the twists and turns of how its various uses evolved is in and of itself a fascinating story but well beyond the scope of this piece. Today, there are many different types of life insurance, with three of the most important being Guaranteed Renewable Term (“GRT”), Variable Universal Life (“VUL”), and Whole Life. In future posts I will talk about GRT and VUL, both of which can be used by organizations as well as individuals for financial management, but today I want to talk about Whole Life as, in my view, it has been subject to a great deal of unfair criticism and yet is one of the most important tools available to ensure your holistic financial wellness.

Whole Life is what I bought from John as a 23 year old, and for a young person just starting out in the world it can be one of the smartest purchases you will ever make. For almost 40 years, I paid a small premium every month into a vehicle that provided me with both insurance protection and a tax sheltered investment. Some of my premium went to paying for a death benefit (the “cost of insurance”), but the vast majority went to the “Cash Value” which was an investment account that received guaranteed interest and accumulated tax free. Initially the death benefit was very modest ($20,000 if I remember right) but with the additional policies I purchased in the ensuing years, the death benefit ultimately grew to almost $1million. Thankfully it never got paid. Even though I survived, and in some sense a portion of my premiums were “wasted”, the presence of that protection gave my wife and son the significant comfort of knowing that in the event of my untimely demise they would be taken care of. That comfort (and the steps that my wife did not have to take as a result) contributed to our family’s financial wellness and should not be underestimated. Furthermore, because I was so young when I bought the policy, the cost of insurance was very modest and continued that way for the life of the policy. In fact, even after considering that cost of insurance, the Cash Value accumulated at a compound tax free annual rate of almost 6% and as of last year that “forced savings account” was worth more than $400,000.

But my policies were even more valuable than that. As my financial life got more complicated and I moved from city to city, bought and sold houses, got married, divorced and married again, there were times when I needed cash, sometimes a lot more cash than I had readily available. And so several times I was able to borrow (essentially from myself) amounts I needed from the policy and pay myself back over a period of time and at a rate that was completely within my control. In short, the Cash Value provided a “buffer” that allowed me to get over the “liquidity bumps” that we all face as we make our way through life.

Recently, because I am about to retire, I converted my policies into “reduced paid up status”. As a result, two more extraordinary features of my policies have come into focus each of which will be extremely valuable to me in the years ahead. First, about one half of my $400,000 cash value is considered “cost basis” that I can withdraw and spend any time I want and never pay tax on it. It is a powerful source of emergency savings that I can tap into should an unforeseen contingency arise. Second, and even more importantly, I now have a guaranteed death benefit of $800,000 that will go to my wife (or other beneficiary if she dies first) tax free.  If I were to try and buy such a benefit today it would be extremely expensive and maybe not even available without undergoing a full medical exam. This is not only valuable in and of itself, but that $800,000 death benefit will allow us to withdraw more from our 401(k) savings than otherwise, because we know that we only have to use that money while I am alive and that after I am gone the life insurance will take care of the rest. That is what holistic financial wellness is all about.