Kuderna
A few years ago I wrote a satirical article titled “Why Whole Life Stinks”. I think it’s time to revisit this age-old financial instrument and the love-hate debate among financial professionals. why now? Only time can truly stress test your financial plans, constantly providing new angles to evaluate your decisions. In recent memory, the world and economy have changed dramatically, but whole life insurance has not.
Hundreds of billions of dollars of new premiums flow into life insurance every year. In 2021, whole life insurance premiums will grow 20% year-on-year, accounting for 35% of all individual individual life insurance, the most popular form of life insurance among term, universal and index insurance (by total insurance premiums). Universal or variable universal life insurance. Let’s take a look at some common reasons why whole life insurance is still popular.
As the title suggests, I own a lifetime, but to be fair, I also own most other assets a financial planner could handle.
it helps me sleep at night
When an investor asks themselves where they can invest their money, a risk-reward analysis usually comes first. Whether it’s a She 401(k), a Roth IRA, a 529 College Savings Plan, or a brokerage account, investors are faced with a choice. Most data show that aggressive stocks give the best long-term results. But individual investors always struggle to stay on course long enough to realize such long-term results.
Let’s take a look at the year-to-date return data for 2022 as of October 20th. The tech-heavy Nasdaq is down 33%, the MSCI Emerging Markets is down 28%, the small cap Russell 2000 is down 25% and the S&P is down 25%. 500 is 23% down. While performance over the past few years has shown the stock’s merit, 2022 supports the universal compliance disclaimer that “past performance is no guarantee of future results.” Investors’ individual returns may differ from those described based on their selection of mutual funds, exchange-traded funds or stocks, but we are certainly feeling the pain in today’s economy.
Investors wary of years like this one often look to bonds to make up the building blocks of bonds. Low risk, low reward may help you sleep at night. The words “bond” and “bond” usually mean safe for investors. However, this form of debt carries its own risks.
For example, the issuer may default on its debt service. Corporate bonds are rated for risk by credit rating agencies, ranging from “junk”, also known as high yield, to investment grade. Investors looking for the safest will typically consider US Treasuries backed by “the full trust and credit of the US Government.”
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But there is another bond risk, interest rate risk. This happens when prevailing interest rates rise, causing the value of existing bonds that were previously issued at lower interest rates to fall. Here, 2022 taught many a tough lesson. The Bloomberg U.S. corporate bond index is down 20% year-to-date, strikingly close to the decline of the broader stock market, as the Federal Reserve hiked interest rates at an alarming rate to combat inflation.
A lifetime investment is not strictly an investment, but offers two monetary values: a death benefit and cash value. Both figures grow with guaranteed interest rates and potential dividends. Judged by the same parameters as bonds, buyers may be reminded of default risk and interest rate risk. In terms of financial stability, the buyer can choose from companies that have stood the test of time since the mid-1800s. Some of the top carriers are mutual companies. This means that the policyholder is 100% owned by him and has no external shareholders whose interests may conflict with the policyholder’s long-term interests.
Finally, life insurers must adhere to strict capital reserve requirements to deal with unexpected financial events. With respect to interest rate risk, insurers are constantly adding new assets to their multi-billion dollar portfolios that reflect current interest rates. As a result, the dividends of the best insurance companies often follow the movement of market interest rates. Moody’s.
it helps my family sleep at night
Many experts make the mistake of comparing investment portfolios directly to cash value returns, but buyers should remember that it is whole life insurance. This means that the basis of the product is the death benefit. This is a permanent and continuously increasing amount as long as the premium is paid in full and on time.
Investors often build their portfolios with a goal in mind and use it differently as life unfolds. Permanent death benefits offer the flexibility to be reused at different stages of life. For a young professional, there is the possibility of protecting the lost income of a family member or business partner in the event of an unexpected death. For those who have already sent their children to college and paid off their mortgage, caring for aging parents facing high medical bills, or a family breadwinner’s pension that has not been fully realized. It may be an influx of capital to replace it. For retirees, the death benefit serves as a permit to renounce a spouse’s inheritance, interrupt traditional plans, or use other assets without correlation to the stock market. increase.
It may be the answer to Uncle Sam
Even if your investment portfolio works as expected, the IRS is ready to levy taxes on everything from pre-tax retirement distributions to capital gains and interest income. Additionally, Congress can change these tax rates. This is what often happens when the political winds shift.
Since the federal income tax was enacted in 1913, life insurance has received preferential tax treatment depending on its original use to support widows and children. Life insurance death benefits may be received tax-free by the beneficiary and the value of the cash may be increased by tax deferrals, first-in first-out withdrawals or loans. The United States currently has over $30 trillion in debt, something to consider when planning your taxes for decades to come.
It can be a self-contained plan
Lifetime can include disability protection. Losing income due to illness or injury can be financially devastating to families and businesses. This can include premium disability waivers, where the insurer continues to pay premiums on behalf of policyholders with disabilities. Individual disability income insurance is an ideal tool to replace lost income, but it is often not enough to help investors continue to fund their retirement and wealth planning goals.
Able to cover long-term medical expenses
Long-term care has become a baby boomer buzzword. As people live longer, health care costs regularly outpace inflation. The national average cost of a private room in a nursing home is $9,034 per month. This cost can lead to the depletion of a perfectly planned retirement or estate plan in the last years of life.
Once again, life insurance death benefit income can replace these lost assets. Alternatively, some whole life insurance may include a long-term care feature that allows death benefits to be paid in advance while the insured lives to pay for such medical expenses. .
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As defined benefit pension plans have become less common, qualified defined contribution plans have become the default choice for most workers. Sometimes life doesn’t go according to plan, or conversely, an unexpected opportunity presents itself at which point he appears to have a 401(k) or an IRA in his lockbox. Such retirement plans stipulate that withdrawals may be subject to an additional early distribution tax penalty of 10% if accessed before age 59 ½ (with the exception of certain IRS exceptions or loan provisions). I’m here. Whole Life’s cash value also increases with deferred taxes, but it’s not a plan that qualifies for the IRS early withdrawal penalty.
Whole life insurance is not considered an investment. However, after considering the above reasons, it will prevent you from becoming a fearful emotional investor without having to worry about investing in a difficult year like 2022.
Each year, I invest far more in real estate and stocks than I do in life insurance premiums, but each premium I pay is an investment of disposable cash that I move to flexible and safe means of contingency. It represents a lot. That’s why I like my lifelong policy.
Bryan M. Kuderna is a Certified Financial Planner, Kuderna Finance Team, a financial services company based in New Jersey. Host of The Kuderna Podcast. His new book, What Should I Do With My Money?: Economic Insights for Building Wealth in Chaos Pre-order available.
