Having just covered Term Life Insurance one can easily see a disadvantage in this approach. Premiums are never level and at some point will increase. Add the fact that there is no cash value accumulation and you have many disgruntled policy owners. So the Life Insurance companies, not wanting to lose business, developed a plan to attract new investors. The Life Insurance industry said we will give you a “permanent” policy for your entire life (generally ages 65 – 100) and we will offer a cash value accumulation. Hence the Whole Life Insurance policy was born.
Before we deal with the applications of this type of Life Insurance to fund your Buy-Sell, I believe it’s important to review a few key concepts. First is the use of illustrations. Due to government regulations, all companies and their agents are required by State Insurance Law to provide a written illustration to all prospective buyers. In my cynical mood, I call these illustrations “little ants crawling across paper.” The problem is that these illustrations are based on faulty assumptions. Compounding the problem is that over time, these problems are compounded to create additional problems. So while you need (required) to have these illustrations, make the best of them. Ask the agent and or company for a summary page. In addition, look over these two components, the Net Payment Index and the Surrender Cost Index. These will reveal the true cost of the policy and are very helpful when comparing one policy to another.
In addition, there are two forms of Whole Life companies, Mutual or Stock companies. The one important difference between the two is the way cash accumulation is dealt with. With stock companies, the excess company profits are first paid to the stockholders. With a mutual life insurance company, the policy owners are in effect stockholders and they, the policy owners, will be paid first and in the form of dividends. It’s important to note that these dividends are tax-free. Dividends are not guaranteed and can and will fluctuate based on the performing assets of a said company and the investment return of the companies cash assets.
The typical investment portfolio of a Life Insurance company would consist of the following vehicles. Perhaps the biggest portion would lie in long term corporate and government bonds. Many companies additionally invest in real estate holdings. To a much lesser extent, they invest in dividend paying stocks and hold cash assets. Therefore, it is essentially an ultra-conservative portfolio.