Whole life insurance is considered life insurance first and foremost, and is commonly purchased to provide peace of mind. That is, if something happens to you, you know your loved ones will still be financially secure. In fact, Whole Life Insurance is the only financial product that guarantees that what you want to have happen will happen, as long as you do as specified in the contract.
But beyond their obvious benefits as a life insurance policy, whole life products are also excellent investment tools that can lead policyholders to a life of financial independence. When structured correctly, whole life insurance policies allow you to enjoy your money now and still leave a financial legacy for your heirs.
A Safe Investment
When you use whole life products as an investment vehicle, you can rest assured that your investments are safe. Life insurance companies have a proven track record of investment strength and security. They have historically outperformed banks and other financial institutions for several reasons.
For one, whole life insurance polices are not chasing short-term performance to satisfy impatient investors. The professional money managers working for life insurance companies are not seeking a quick return on money, but rather a long-term strategy for financial stability. Whole life insurance fund managers invest in secure bonds. Additional stability is provided by diversifying bonds by industry, maturity & geography. This keeps costs and risks very low.
Additionally, most states guarantee whole life policies through state Life and Health Guaranty Associations. Guaranty associations operate much like the FDIC does for banks. Guarantee limits vary by state, but most states regulate insurance companies and provide guarantees to policyholders through these guaranty associations. Life insurance companies in these states support one another and if one fails, the others will be assessed the money to pay the claims of the insured persons who held policies with the defunct provider. You will need to check with your state insurance commissioner to see if your state has a guaranty association and what the guaranty limits are.
Using Whole Life as an Investment Tool
Whole Life insurance policies lend themselves to several investment uses, most commonly as a safe reserve for cash values earned by the policy. Cash values accumulate over time through premium and dividend contributions. The growth of these cash accumulations within whole life policies are tax-free.
This cycle begins with your premium payments, which initially fund your policy. The insurance company will, in turn, invest a portion of your premiums in very safe financial instruments such as bonds (as previously described). Financial gains from these investments may be distributed back to your account as dividend earnings when performance exceeds expectations. Dividends are not guaranteed and may not always be paid. However, solid insurance companies have paid dividends every year for the past 100 years, including during the Great Depression.
Through your premium payments and dividend earnings, the cash value within your policy will begin to grow, and that’s where the greatest investment benefits begin. Both a whole life policy and a dividend paying whole life policy allow you to utilize what’s known as the Infinite Banking System. But a dividend-paying policy offers greater tax advantages, allowing for greater cash growth.
Being Your Own Bank with the Infinite Banking System
The Infinite Banking System is a financial philosophy of being your own bank, and dividend-paying whole life policies are especially suited for this concept. Infinite Banking means taking control of your financial dealings, not just handing them over to some financial advisor or institution. To begin to understand the investment potential of Infinite Banking, you must first understand banking.
In the traditional banking system, you ask the bank to both save your money and lend you money. When you borrow money, you do so at a higher interest rate than your saved money earns. The difference between these two values is profit for the bank. By charging higher interest than it gives, the bank earns money.
What the Infinite Banking System does is make you the bank. You will save with your bank through premium payments and dividend earnings. When you borrow from your bank, you will pay the loan back to yourself with interest, thereby increasing your cash values. You’ll be paying yourself…becoming the bank.
So you are financing and making money off yourself, instead of paying that money and interest to a bank or other financial institution. Some insurance companies even allow you to continue to earn interest and dividends on your entire cash value amount, as if you had never borrowed money.
When used correctly, the more loans an Infinite Banking policy finances, the more money it makes for its policyholder. This is because loans from your life insurance policy are similar to home equity lines of credit. Interest is only paid on the amount of the remaining loan, so every time a payment is made, overall debt is reduced, thereby reducing the amount of interest paid over time. And because you are paying on an ever decreasing amount of money, you also end up reducing the total number of payments needed, which means even more saved money. If you make all payments as scheduled, including your interest amount, the policy cash fund will continue to grow.
You will have to start with smaller loans, perhaps a necessary home repair. If you are disciplined about paying back your loan and interest, you will soon have enough money for a larger loan, perhaps a car, and eventually even a home. You can see that overtime, the Infinite Banking Concept provides a way to break the cycle of making money for the banks and other lenders. Instead you’ll be making money for you. There are no loan fees, transaction fees or late payment fees assessed to these self-financed loans.
Tax-Free Benefits
Investment gains lose their thrill if you have to pay exorbitant fees and taxes on them. Whole life insurance offers many tax benefits to policy holders. Earned dividends are not subject to tax, and cash values within your policy increase tax-free. Distributions also can be received free of tax through policy loans. The death benefit proceeds pass to your beneficiaries income tax free, and if structured properly, life insurance proceeds can be received free of estate taxes.
You’re Best Investment Option
It’s hard for other investment tools to beat the benefits of whole life insurance. Whole life provides investment security, tax-free earnings, and if used as an Infinite Banking policy, it can lead to greater investment growth and eventually, financial independence.