Healthy returns Featured

8:00pm EDT September 25, 2009

If you knew that you would win the lottery 20 years from now, would that affect how you spend your money between now and then? Of course it would, and investing in life insurance can give you that security.

“That’s what you have with whole life insurance; you have a guaranteed payment coming into your estate,” says David Burch, senior partner at Lighthouse Financial Advisors LLC, a branch of Peachtree Planning Corporation. “Unlike term insurance, which rarely results in the payment of a claim, whole life insurance guarantees a payment will be made.”

The strength, safety and versatility of life insurance can make it an ideal investment.

Smart Business spoke with Burch about the renaissance of whole life insurance.

Why is now a good time to consider adding life insurance to your planning strategy?

Because of the decline in the stock and real estate markets, many people don’t have the wealth they thought they had, and they are looking to preserve their remaining capital with safer asset classes with guaranteed returns.

If you have $400,000 in the stock market and you needed cash right now for an emergency, wouldn’t it be a terrible time to sell your stocks if they are down 30 to 40 percent? If you had that same $400,000 in your life insurance, you could use the cash value to provide an interim loan to your business to keep the doors open. The same is true for real estate. The decline in property values has wiped out a great deal of equity that investors were using to provide liquidity.

Life insurance can be a good way to rebuild that equity for the future and possibly recover some of those losses for your heirs.

What are the advantages to investing in life insurance?

Most people buy permanent life insurance because of its safety and the surety of guaranteed returns. The value of stocks or bonds is at risk to go up or down depending on movements in the markets. But with life insurance you have guaranteed returns from the insurance company. If you own a policy from a mutual company, you receive part of your return usually around 4 percent guaranteed and additional income based on the company’s profits. Depending on your age and health, it is possible to earn a 5 to 6 percent tax advantaged return over your lifetime in a permanent life insurance contract.

Another important advantage is the tax benefits. If you take a loan from your policy, it is not taxed, and the proceeds at death are income-tax-free to the beneficiary. In many cases, it can be estate-tax-free, depending on the size of the estate and how the policy is owned.

Probably the most overlooked advantage to investing in life insurance is that you have access to quality, professional money management. Insurance companies have some of the best managers in the world working for them, managing large, well-diversified portfolios, working to increase your return and preserve the safety of your capital.

Many states offer additional protection and guarantees to life insurance policyholders. State insurance commissions regulate the insurance companies and their policies. State guarantee funds protect policyholders from the failure of an insurer, and in many states, a policy’s value is not subject to the claims of creditors.

What are the major areas of concern for investors?

Investors need to consider the amount and the type of insurance they purchase. They should work with a competent insurance professional to determine the proper amount of coverage to protect their family. Then they need to fully understand the costs and benefits of owning different types of insurance.

Why should investors consider whole life insurance instead of term insurance?

What looks to be the cheapest may not always be the least expensive. You have to consider the time frame that you will own any investment and what the total costs are over the entire time you own it.

Most people today outlive the term of their term life policy. It’s a fact that less than 1 percent of term contracts ever result in a death benefit being paid by the insurance company. The insurance companies love term insurance, because 99 percent of the time they win; 1 percent of the time the customer wins. Most people end up dropping term insurance because it becomes more and more expensive the longer they live.

If you invest $2,000 a year in a policy for 20 years then the value of that money is gone — not just for those 20 years but for the rest of your life. You lose the money invested in the term policy and the money you could have made if you had invested those funds elsewhere. Conversely, permanent life insurance delivers a guaranteed return and the investor receives guaranteed value for the money invested. It may be more expensive in the short run, but over the course of the policyholder’s life, the true cost of insurance is much less.

What can you do with a whole life policy?

Permanent life insurance gives you options on how you spend money in retirement because you know your estate will receive the death benefit. For example, if you get to retirement and find that Social Security, your pension, and your 401(k) are not enough income, wouldn’t it be nice to be able to take the equity in your home and turn that equity into retirement income and do a reverse mortgage? Then when you die, the permanent life insurance you own is payable to your spouse. Your spouse pays off the reverse mortgage and then has the house equity to do another reverse mortgage to provide retirement income during his or her life.

David Burch is senior partner at Lighthouse Financial Advisors LLC, a branch of Peachtree Planning Corporation. Reach him at (912) 634-0055 or david.burch@peachtreeplanning.com.