A safe haven Featured

8:00pm EDT April 25, 2009

Throughout today’s turbulent economic times, there has been at least one safe haven for investors: whole life insurance. Although people have been investing in whole life for more than 150 years, it has experienced a surge in popularity due to its rock-solid dependability.

“Whole life insurance has built-in guarantees that are not subject to daily stock market fluctuations or risk,” says Lamar Barden, vice president of Peachtree Planning Corp. “Investors have been watching their 401(k)s and mutual fund assets lose 30 to 40 percent in value over the last year and many are looking for assets with a guaranteed return.”

Smart Business spoke with Barden about why investors should consider whole life insurance as an asset class.

Where does this strategy compare to other investments in terms of risk and effectiveness?

As far as risk, in a whole life contract, there is not a direct stock market risk or bond market risk, such as in a variable life policy. The cash value in a whole life policy is guaranteed by the insurance company issuing the policy. Once dividends are credited to a policy, they are guaranteed. While dividends are not guaranteed, you can find many mutual companies who have paid dividends for more than 100 years. Life insurance differs from other asset classes because of the guaranteed build up of cash value. When the cash value becomes available, it is safe, liquid and can be used at the request of the policy owner. The existence of this cash value has enabled many clients to feel more secure in the market downturn because their whole life values actually increased, creating more liquidity.

How could people get started with this opportunity?

They would need to talk to a professional representative who can help explain all the benefits of owning a whole life policy in their portfolio. Typically, it does not take a tremendous amount of money to get started with a life policy, but investors need to understand that the cost and availability is determined by their health and insurability. Many times, people may put off getting started and then suffer a health problem that makes the purchase difficult.

A properly funded whole life policy provides a crucial, guaranteed base on which you can build a very effective investment portfolio. It will allow the client to have options throughout their life so they can take advantage of economic opportunities that may come their way.

What do investors need from a whole life policy?

Most clients will definitely need and want a permanent death benefit for their family. The death benefit is an increasing value — the older you get, the better it gets. Most people would choose that, because death is not just a possibility, it’s a certainty. Also, when all the uses and functions of the cash value are properly explained, people want the opportunity to have a cash account that they can always go to in an emergency or when they want to take advantage of an opportunity. It can be the perfect place for your rainy day savings.

With the help of a knowledgeable professional representative, and when used properly, cash value can help you recover fees, finance charges, interest payments and even principal payments. This principle, called ‘cost recovery,’ is one of the principal benefits of owning whole life insurance.

How does cost recovery work?

A good example would be a business owner who uses the cash value in his life insurance policy to finance an equipment purchase. Because of the unique structure used in policy loans, he is essentially paying himself back. Otherwise, that money would have gone to some financial institution in interest fees, loan payments and things of that nature.

What else do investors need to know about using whole life insurance as an asset class?

Because of the tax-favored treatment of life insurance under current tax law, a maximum-funded policy can be used to take advantage of many opportunities to build wealth for the policyholder on a tax-favored basis. When a policy is funded up to the maximum IRS limits, it can perform better and is a great addition to your financial

Lamar Barden, MSFS, CSA, is a vice president of Peachtree Planning Corp. Reach him at lamar.barden@peachtreeplanning.com or
(404) 260-1600.