I have wanted to put together a tour de force case for whole life insurance for some time now, so here it is. This is going to be a long post compared to my usual blog posts but I think it is worth your time to read the entire thing. There is a lot to talk about whole life insurance versus alternatives out there and this will be comprehensive so I think it will be educational for everyone no matter how much you may already know. I will primarily be making the case for whole life insurance in this blog as opposed to putting down alternatives. I have other blog posts that compare and contrast other financial vehicles with our whole life based savings plans so you can find more on that elsewhere on this site. For this post however I am going to try and stay positive on the good things that whole life insurance can do for you and your family.
First of all I want to say, in the interests of full disclosure, that I am biased. There are those who claim to not be biased and that they give “objective” advice. This is true in one sense of the word “objective” and not true in another sense. The first sense in which people may be biased in the financial world is that they are incentivized by commissions to offer or recommend certain products over others. This happens in a lot of areas of business as well as the financial world. While this kind of structure does introduce an incentive to recommend one thing over another it does not guarantee that someone will operate in bad faith, in fact most do not. Many advisors operate under a standard of Fiduciary responsibility although not all do. (see Fiduciary Duty here) It is entirely likely that financial professionals will recommend or offer something that is not necessarily the most profitable to them but in their clients best interests and it happens all the time. It’s a matter of integrity not how they are compensated. Find someone who takes pride in their integrity over the balance in their checking account and it doesn’t matter how they are compensated they can be counted on to do what they believe is right. Find such a person is like finding gold. Keep that relationship and recommend them to others that you care about. So yes, I am biased in this way. I sell whole life insurance and I make commissions on selling that product, among others. However I want to point out that in and of itself does not mean that what I am about to present to you is wrong or merely self serving. In my case I got into this business because I discovered what it could do for me and that it could help other people as well. I am not making the case for whole life insurance because I sell it, rather I sell it because I am convinced of the case for whole life insurance. I think that is an important distinction to make. The second way in which people are biased is simply in the sense that they have made up their minds and are not open to any alternative views. Many people who do not sell insurance at all have claimed to be “unbiased” yet they are unswerving in their opposition to it. (ergo Dave Ramsey/Suze Orman) While it is true that they are unbiased in the first sense, meaning that they do not make money from the sale of the product, that does not mean that they are totally objective. They have formed an opinion for their own reasons and they are sticking to it. The point here is to remember that just because someone claims to be objective does not mean they are right. You can be sincerely incorrect and it is my view that these very prominent experts are on this issue. So to summarize these points just because I make a living selling this product does not automatically mean that my arguments are invalid, they need to be weighed on their own merits, and likewise just because someone claims to be objective does not mean they are automatically right. Again the claims need to be evaluated on their own merits. A logical fallacy is involved here, it’s called the Ad Hominem fallacy. The Ad Hominem fallacy fails because it does not deal with the issue being discussed rather it deflects the issue towards the person who is making the argument. Rather then deal with a point of a given argument you refer to the person who is making the argument is some derogatory or discrediting way. Attempting to appeal to the emotion of the audience rather then deal logically with the issue at hand. The truth does not depend upon the qualifications or motivations of the speaker to be true. Put simply if someone who is not a meteorologist claims that it’s sunny outside, you judge the claim on it’s own merits. You don’t say “well your no expert” and so based on that disbelieve what they say. They may in fact not be an expert or they may in fact want it to be sunny for personal reasons, but none of that means that what they have claimed is necessarily false. It might mean you need to investigate the claim further, but to simply dismiss the idea based only on an Ad Hominem discrediting the messenger is to engage in logical fallacy. So, the next time someone claims to be objective or accuses someone else of bias know that it is an Ad Hominem fallacy and is irrelevant to the issue at hand. There are no shortcuts, investigate any claims made by someone based on the evidence or logic of the claims themselves, and be careful not to easily dismiss something simply because someone may be “biased”, you may miss out on something important.
Having said that lets move on the subject at hand, whole life insurance. It is my sincere belief, and the reason that I started this company, that whole life insurance is one of the most affordable, flexible, tax efficient and dependable financial products you can put your hard earned savings into. It is not perfect and I will discuss the downside, but the downside tends to have to do with the deficiency of the currency itself rather then whole life insurance as a financial instrument per se. So let’s dig in.
First of all let me just say that if you are on a very low income, and you are just barely making ends meet, whole life insurance is not for you. Whole life insurance is like combining insurance and a savings plan so it does involve having some money left over at the end of every month to put into premiums. It doesn’t have to be much, but if you are living very lean and still barely making it then you should look into a very inexpensive term life policy which can cost you very little and give you and your family the protection everyone should have. That is the minimum that every family should have and if you don’t have that through your work then contact us and we can help you with a very affordable term policy. Having said that if you have money to save and set aside each month then you should read this entire post thoroughly. My rule of thumb is this, if you can afford a car payment (even a modest one) you can afford whole life, and as a bonus you will never have to make a car payment ever again, but we will get into that later.
Here are the key features and advantages in my case for Whole Life Insurance:
1. Fights Inflation – This to my mind is a very powerful feature and many don’t understand it because they don’t understand how our current monetary system works, but whole life insurance does not just keep up or beat inflation by growth, it can actually fight inflation. What I mean by that is it can prevent inflation from occurring or at least mitigate the amount of inflation the banking system produces. I am not going to go into the intricacies of how the banking system inflates the currency here. If you want to read that check out my previous article on inflation (What Is Inflation Anyway?) The point however is that by using whole life insurance more and banks less you can help curb the inflation of the money supply. If the entire nation did so there might be very little if any inflation in the economy and that would be a good thing. Can you imagine the value of your dollar increasing over time instead of decreasing? That was a common expectation in the 19th Century. No one expected their money to lose value over time, it always got more valuable. The 20th Century institutionalized inflation as a new norm. Through self-financing with whole life you can protect yourself while helping the rest of us at the same time. That’s what I like to call a win/win.
2. Tax Free – Whole Life insurance is probably the best tax exemption there is in the US tax code. The dividends that whole life insurance pays are tax free, the growth of the equity is tax free, access to the money during your life is tax free and the death benefit to your heirs is tax free as well. Total tax freedom. In some cases and states there may be some structuring needed to the asset in order to avoid estate taxes however this is entirely possible and simple. In some states even that is not necessary and depending on your total assets there may be no Federal estate taxes either but those can easily be avoided as well. We hear a lot these days about tax deferred, but tax free beats tax deferred every day of the week. For instance, a lot of people have a 401(k), however the 401(k) is a tax deferred account. Which means as it grows you will be taxed on disbursements as you take the money out in retirement at a time when you don’t know what the tax rates may be. If you can draw from a whole life policy designed for retirement there a no taxes due, ever. This tax freedom is so great that competitors to the insurance industry such as the bankers lobbied the government to restrict how much money people could put into their insurance polices. They were unfortunately partly successful, and the government limited the proportion of equity to death benefit within a policy. If this proportion is violated then the tax incentives are lost. I for one believe this law should be repealed since all it does is serve the interests of the bankers not the consumers. However this law winds up only having the effect of extending the time it takes to put money into a policy it does not limit the amount. So for example in the old days before the bankers meddling a very wealthy fellow could just drop a huge amount all at once into a life insurance policy and it would all be tax free. Now he can still do the same thing but the money would have to be spread out over at least a 7 year pay test period, and the equity in the account would have to stay within a certain defined proportion to the amount of death benefit or protection in the policy. So this admittedly is a complication, but it is one that any competent insurance professional can solve for you very easily. So be sure to work with someone who will help you ensure that you do not lose all the wonderful tax advantages the whole life insurance brings. The advantages are still there you just need guidance to ensure that your policy is designed properly to retain the tax advantages. The tax advantages of whole life are significant enough to compel many people to get out of their 401(k) plans early while the balances are not too large, take the tax hit on a low amount, and start a whole life based plan.
3. Debt Freedom – Using other people’s money (OPM) is a popular topic these days but there is a huge disadvantage to borrowing, you lose all the interest. If you borrow from a bank, finance company or even a relative your going to pay back at interest and those interest costs are lost to you forever. It goes in someone else’s pocket and you will never get it back. You say well of course, if I borrow, I should pay back with interest and I agree, you always should. However what if I told you there was a way to borrow and pay the interest back to your own savings plan rather then to someone else? Recovering those lost dollars is a very powerful concept, and it can make a huge difference in your level of wealth to never lose interest to someone else. There are few ways to do this but whole life insurance is probably the best way. Let take making a car purchase as an example. If I sock money away in a bank account of course I can then withdraw to purchase the car and then pay myself back at interest. This is far superior to borrowing, however it requires you to keep saving throughout your life in order to make another purchase since you are not earning interest anymore once the money is withdrawn. With whole life insurance you can accumulate your savings for a vehicle as before and once you have accumulated enough that you can make your purchase you can borrow the funds from your policy. Now here is where it gets different, a whole life policy as we recommend will continue to pay you your dividends as if you had never withdrawn the money in the account. This is like nothing else that exists. Imagine trying that with the stock market? It can’t be done. Also once you have accumulated the amount the account is designed for, you no longer need to contribute, you can now borrow and pay your own account back with interest all the while not losing out on growth that you would have earned if you had not taken the money out of the account. Nothing else I am aware of does this. If you borrow money out of your 401(k) or savings account you lose the interest or growth that money would have otherwise earned. Yes your paying yourself back an that is a good thing but at the opportunity cost of what that asset might have earned if you didn’t draw it down to borrow. With whole life insurance there is no downside to borrowing from yourself. In fact this feature of whole life is so powerful that many people have an entire system of policies (more then one policy owned) just for financing things like cars, homes, investments, business equipment, vacations you name it. The cool thing is that unlike 401(k)s and IRAs where you are allowed one, there are no legal limits on how many whole life policies you can own. Which leads me to the next advantage.
4. Scalable – Whole life insurance is private property just like owning equity in a piece of real estate or owning a gold coin. It’s yours it belongs to you. There are no legal limits on how much you can own. Unlike a 401(k) which has matching limits, and IRAs which have contribution limits your whole life insurance has no upper limit on it’s value. It does have a limit on the proportion of equity to death benefit but that proportion is scalable to any amount. Also the other thing is that you can own more then one policy. Some people have a dozen or more policies, one for a specific purpose. You can only ever have one IRA or 401(k) and that severely limits their potential. Whole life is merely a private contract between you and the insurance company. You are free to contact with them as much as they are willing to contract with you. The 401(k) and IRA are government creations, entries in the IRS tax code. They are subject to sever restrictions, and are not as easily scalable as a result. Whole life is far more flexible as a result of the increased freedom these contracts enjoy.
5. Privacy – There are very few financial assets that don’t have to be reported to the IRS, most of them have to be out of the country such as foreign land, foreign trusts or foreign precious metals in foreign safes. However one of the few domestic assets that you nor your heirs need to report to the IRS is life insurance. A properly designed whole life plan will allow your beneficiaries as well as yourself to receive funds without the need to report the income to the IRS. Why? Because it’s not considered taxable income. Insurance compensates for a loss, it is not considered profitable by the IRS and the IRS only taxes personal and corporate “profits”. This must be done properly because if done in the wrong manner then the moneys will be reportable. For example, rather then take a withdrawal of funds from your whole life plan you should borrow from your whole life insurance instead. One act is reportable as income the other is not. Unlike most loans we are accustomed to loans against life insurance do not need to be paid back. However it is an extremely good idea to pay back the loans unless your using the money for your retirement. There are other good economic reasons why you should do this as well, but privacy and non-reportablility is one of them. This is not even remotely possible with a 401(k) or an IRA of any kind. Now if you get into a situation where the IRS is coming to collect back taxes they will treat your equity in your policy like any other asset and may freeze or seize it. So lesson here is don’t get on the bad side of the IRS and pay your taxes as much as your legally obligated to pay. The good thing here is that your equity is protected from taxation itself so it can help reduce your tax liability.
6. Affordable – The cheapest life insurance you will ever buy is whole life insurance. Yes I said it. You have heard the exact opposite from almost every corner but the truth is whole life insurance is the cheapest insurance you will ever own, in the long run. Where many financial “experts” go wrong is that they make a very simple comparison of the premium for a whole life policy and the premium for a term policy and come to the conclusion that term is far cheaper. What this simplistic assessment does not take into account is the fact that most of what you are paying for when you pay whole life premiums is going to your savings component. If you compare the pure insurance portion of your whole life policy to a term policy it is very competitive out to the term, and then only gets better from there. This requires long term thinking to understand. Let me demonstrate why this is true with an example for which I will use real numbers from a real insurance company’s illustration software system. Two men bought life insurance, Larry and Moe. Larry bought a term policy for 20 years and Moe bought a whole life insurance policy, paid up in 20 years. For the sake of this comparison we will assume both men are age 35 and in the same health condition when they purchased their policies. The coverage of both Larry and Moe’s policies is $250,00o, although the amount is not important it’s merely important to understand that they are starting out with the same amount of pure insurance protection. Larry with his term policy will probably have to pay about $36 a month for that policy, a total of $8,640 over the 20 year life of that policy. Moe bought the same amount of coverage, $250,000, in a whole life policy and his premiums he needs to pay each month come out to $241 a month, a total of $57,840 in premiums over the same period of time as the 20 year term policy. The whole life premiums are a little less then seven times as expensive as the term policy, so therefore whole life is far more expensive then term, right? Wrong. Yes $241 a month is more then $36 a month, but if all you do compare the premiums then you have not fully evaluated the situation. Lets look at what each man has after 20 years. When Larry turns 55 he has paid $8,640 to the insurance company and he now has, nothing. No protection, no equity, nothing. If he wants to continue to have insurance protection he must purchase another policy that will now charge him more based on his new age (easy to calculate) and health at that time (impossible to predict). So he may not be insurable at all for all we know but if he is his monthly premiums to renew is now going to be $198 a month. Wow, that’s a huge change, and nears the price of the whole life policy from the start. In fact that price might make buying a policy out of the realm of possibility. Larry had better be in a position to be self insured (wealthy) by then or else he and his family could be in a bad way. So what does Moe have to show for his money after 20 years of premiums? Well Moe has paid a total of $57,840 to the insurance company over twenty years and he now has $66,153 in equity in the policy (which he can access for anything he wants) and still has $264,094 in coverage, and these amounts will continue to grow until the end of Moe’s life even if he does not make one single further premium payment. If we go no further then this we have to realize that Moe got the better deal, his equity at the end of the 20 years already exceeds the amount he has put in. His cost for pure life insurance was effectively free. Let’s now say that both men live to the statistical average age for men of 82. At that point Moe will have $413,485 in coverage to leave to his heirs when he passes tax free. Larry will have no insurance coverage whatsoever to leave to his family at all. Larry had better have an alternative plan or else is family is out of luck. Now in order for Larry to have coverage all the way to 82 like Moe he will have to buy another 20 year term policy at the new price of $198 a month and that still won’t quite get him to 82. So at 75 he will then need to buy another 10 year term policy to cover the remainder of his life, again we are assuming these men are both going to die at the life expectancy age just so we are comparing apples to apples. How much premium will Larry have to put up to do exactly the same thing Moe had done? Larry spent $8,640 for the first 2o years of insurance, he will need to spend $47, 520 for the next 20 years of coverage and at that point he will be 75 and out of coverage again, so he will now need to spend . This is very close to what Moe spent but there is one huge difference. At the end of that time Moe has an asset that is worth far more then what he spent for it, and Larry has nothing to show for his money. Not one penny. Which brings me to the reason why you hear so many recommend buying term, it’s almost all profit to the insurance company. They keep your money and fewer then 2% of policy holders ever collect anything in return. Whole life insurance policy holders always collect, always. Just keep up your end of the contract and you and your heirs win, every time. It’s like a savings plan that gives you life insurance as a free bonus. That is why I say it is the cheapest insurance you will ever buy, in the long run it pays for itself.
7. Guarantees – Unlike many other things in this world whole life insurance comes with contractually enforceable guarantees. Put simply the insurance company has promised to do certain things in the contract and if they do not do those things they can be held civilly liable in a court of law for breach of contract. Even a small unknown insurance company takes pride in meeting it’s obligations. So what are these guarantees exactly? Well things like a guaranteed annual interest rate that usually is more then what the banks are paying. It certainly is these days. The banks today are paying 1% at best. Most insurance companies even in these times of exceedingly low rates are guaranteeing interest in the 4% area, and that is only the guaranteed amount not including any dividends. Speaking of dividends, while getting a dividend is not guaranteed, once the company has declared a dividend for the year that dividend is guaranteed and locked in for that year. That helps provide far more financial stability then the daily ups and downs of the stock and bond markets. Also guaranteed are your premiums. Once it has been determined that your going to get a policy and what the premiums will be those premiums are set for life. They never increase. This is a very good situation in an inflationary environment. Likewise no matter what happens to you, once your policy is in force, you are guaranteed to be insurable for the rest of your life. This is a good reason why it is a very smart idea to get a policy while your young and in good health. You never know what might happen down the road that might cause you to be uninsurable. These guarantees set whole life insurance apart from just about any other financial instrument available today
8. Stable – Equity and coverage graphs for whole life insurance grow steadily over time and resemble hockey stick growth charts given the right amount of time. Stock and bond markets look more like broken hockey sticks as this graph will demonstrate. This kind of graph is why many people are left awake at night worrying about their retirement plans or college savings plans or whatever it is they are saving money for. Waking up in the morning to find that you have been working for the last ten years or so only to be poorer then when you started is disconcerting to say they least. If it wasn’t for the fact that companies automatically enrolled their employees in their 401(k) and matched the contributions put in up to a certain amount then I don’t think nearly as many people would be in the market to begin with. But people are enrolled automatically many times and this puts them in shaky investments that they should never entrust their life savings to. Whole life insurance acts much more like a Certificate of Deposit at the bank. It pays an guaranteed interest rate and a non guaranteed dividend to the client rain or shine. These plans then grown far more steadily then their stock and bond market counterparts. You never wake up one morning and find yourself in the red for all your hard work.
9. Flexible – If you are invested in government qualified plans then government regulations put your assets virtually in prison until official retirement age which is subject to change by the state. With few exceptions, there are severe penalties for early withdrawal, and you can’t even use such “advantaged” funds as collateral for loans. Whole life insurance has no such restrictions attached to it. That is because it is not a creation of the tax code but is a private contract. These contracts are extremely flexible by comparison and there are today many options and riders that can be used to customize these plans to fit your exact situation and goals. Government accounts are regimented to conform to US tax codes, this puts your options in a box and tells you to not go outside the lines. This is not ideal.
10. Professionally Managed – Many people see this as a disadvantage but it is not and here is why. Are you a professionally trained economist or actuary? No? Well that is why you need professional help. The actuaries are specifically trained to calculate the odds and likely hood of the risks involved in their insurance obligations as well as their investment portfolios. They do an excellent job of navigating those waters. Listen to what one of the world’s current experts on monetary and banking theory, economist Jesus Huerta de Soto has to say:
The institution of life insurance has gradually and spontaneously taken shape in the market over the last two hundred years. It is based on a series of technical, actuarial, financial and juridical principles of business behavior which have enabled it to perform its mission perfectly and survive economic crises and recessions which other institutions, especially banking, have been unable to overcome. Therefore the high “financial death rate” of banks, which systematically suspend payments and fail without the support of the central bank, has historically contrasted with the health and technical solvency of life insurance companies. (In the last two hundred years, a negligible number of life insurance companies have disappeared due to financial difficulties.) — Jesús Huerta de Soto, Money, Bank Credit and Economic Cycles. pg. 590
Of course a big reason why insurance companies are so well managed is that they do not operate on fractional reserves like banks do but are dollar for dollar operations. Which brings me to my next point.
11. Safer – Whole life insurance is really analogous to a bank account not an investment account. Although many people compare them to investments they really shouldn’t since investments involve risk to your principle and insurance does not. It is really safe money that is not being risked as opposed to money that is being risked which is the very nature of investing. The question you need to ask yourself is this “Should I be playing the market with my retirement funds?” or “Should I be risking my sons college savings money?” Those are good questions to ask, and that is why many times people save up for things by putting money in the bank instead of the stock market. Maybe it’s retirement or maybe it is something else, but the point is this you do not invest with money you cannot afford to lose. If you have money you can afford to lose, then by all means take a chance and see how you do in the markets. However can you afford to risk your retirement funds? Or your emergency fund? No. That money should be kept somewhere safe and that is why many people keep those kinds of funds at the bank. There is a problem here with the banks as well though, and most people don’t understand this situation. Banks operate under a system of fractional reserves. Meaning that at any given time they only have some fraction of their contactual obligations available to meet those obligations should depositors come calling asking for their money. The fractional reserve banking system creates an additional layer of risk beyond mere investment risk which is bad enough. This additional layer of risk is called counter party risk. Whole life insurance has no counter party risk involved in it since it is dollar for dollar reserves. In other words if everyone walked into a bank and demanded their money back the bank would not be able to pay everyone, however if that happened to an insurance company they would be able to pay all of their obligations. So the insurance industry as a whole is a far safer place to stockpile money then the banking system for this reason alone.
For some reason we Americans have forgotten one of the most traditional of savings vehicles in our history. There was a time, right up until about the 1970s when most Americans had some kind of cash value life insurance policy, it was extremely common. In the 1970s some of the new government qualified plans came into existence, the IRA, the 401(k) etc. and people began to have these plans pushed on them instead. It seems odd to many of us these days but there was a time when most Americans relied on whole life insurance as a major savings vehicle. Why? Because it worked very well, and filled the need for protection at the same time. All while doing so very cost efficiently. We are beginning to see the cracks in the armor of the current conventional approach, which is why I started PaleoSaver, to get back to a simpler and more robust time when people used private contracts rather then government regimentation to save for themselves and their family.
12. NO Fees on Balances – Wall Street has a dirty little secret that they hope doesn’t get out, but it is getting out regardless. The “low” fees that they like to talk about in their mutual funds are very low as a percentage but the real question is “percentage of what?” If your Mutual Fund had a 1% management fee is, which is considered reasonable and definitely not unheard of, that means that they get 1% of your account balance, every year. That’s right, the fees you are charged are charged as a percentage of the total asset value of your account. Oops, that one percent per year is in reality as much as 40% of your total value over a long period of time. As your account grows, which is what you want, then so does the fees your charged. This is the dirty secret Wall Street doesn’t want to talk about. The brokers tout their low fees, but it’s a trick. The brokers are making a killing at your expense. With whole life insurance you don’t pay a fee for management of your money. The people in the home office are paid a salary to manage the entire companies portfolio not just your account. They do not make more as your account grows, they make their salaries and that is all. This system of money management works and is very price efficient compared to the Wall Street model. Also the commissions that you pay to your insurance agent are paid on the contributions you make “premiums”, not the total amount of your equity and those commissions reduce over time rather then increasing. Many people decry the costs of whole life insurance as being onerous, but compared to what? Compared to the fees embedded in your 401k a whole life policy is a downright bargain.
13. Mutuality – All of the companies that we use at PaleoSaver are mutuals. Whats a mutual? A mutual company is to the financial world what a co-op is in other areas. It is not a stockholder owned company, it is a customer owned company. So if you own a whole life policy from a mutual insurance company, you are part owner in that company. The only way to own a piece of such a company is to become a customer. This is why whole life insurance policies from mutual companies pay a dividend to their policy owners. The dividends of a company belong to the owners, and in the case of a mutual company the customers, whole life policy owners, are the owners. So the dividends go to the policy holders. This has another wonderful advantage in terms of how a company is managed. While stockholder owned companies are often worried about their profit reports for the next quarter, mutually owned companies often have a far longer term perspective. This is a good thing if a company is selling policies that may in force for decades and over the lifetime of a policy holder. Mutuals declare a dividend each year based on the previous years performance and that is the shortest term decisions they generally make. Their project things out decades in advance to determine the probabilities and to ensure that they can pay their claims and keep a solid reputation. You never hear State Farm or New York Life being called “Too Big to Fail” and in need of a bailout. There is a reason for that. Mutuality is one of those reasons.
14. Income – If there is one single most important thing to have in retirement it is income without needing to work to get it. In fact that is probably the very definition of what retirement is. There are few vehicles that can provide income without labor, stock dividends (better have a whole mess of stock), being a landlord (more labor intensive then is ideal, unless you hire a property manager), qualified plans such as 401(k) and IRAs (can theoretically run out of money before you want) and last but not least is whole life insurance. Of these Whole Life is the best option in my opinion and here is why. First of all, a whole life insurance savings plan can be used to purchase these other investments if you desire. For example, let’s say I have a whole life plan that I have been stocking funds away in for a while and I have accumulated enough to make a down payment on an income property like a condo of some kind. I can finance that down payment by borrowing from my own pool of resource in the policy and acquire the investment property. Of course I could accumulate enough to buy the property outright if I don’t want to carry debt on the property, or some fraction in between. The choice is yours. I would recommend as little debt as possible, but these are choices we all have to make. If you do your math correctly your renter should more then cover your mortgage and give you some besides. Viola, we have used our savings in our whole life plan to finance some investment that will generate an income. Be sure to pay back your whole life policy the funds you borrowed from it with interest so that you are not cheating yourself. Secondly, whole life insurance can generate an income in and of itself. A properly structured plan can start to pay out income, tax free, to the policy holder upon a planned retirement age. It will never run out of funds, no matter how long you live. How much this income will be depends entirely on how much you have accumulated and contributed to the plan and can vary a great deal depending upon your commitment to contributing to the plan. Unlike a IRA/401(k) however there are no income limits on who can participate and how much. So sky is the limit.
Downsides – I hope that you can now see that Whole Life Insurance can do a lot of wonderful things for your portfolio and that it’s stands alone in it’s flexibility and effectiveness. However there is one downside. This downside is not unique to whole life insurance but there are other asset classes that can protect from this downside while whole life cannot. The main area of concern is Hyperinflation. Hyperinflation is an inflationary environment where the inflation rate reaches into the hundreds, and sometimes many thousands of a percent per year, month or even per day. Meaning that the central bank and the banking system under the direction of the government have begun printing currency at an exponential rate far beyond the norm. If this were to happen the value of all dollar denominated accounts would fall as the value of the dollar itself falls. Any assets backed by something real and not just currency notes would rise to meet the inflation. However, life insurance policies and bank accounts would still show the same balances that they did previously but those balances would be worth virtually nothing by comparison to their original purchasing power. I hope that you can see that this “downside” to whole life insurance is not really a weakness of insurance per se but a weakness of the currency that a policy may be denominated in. However the effect would be the same and the real value of your asset would be destroyed.
The question to ask is what are the odds of a hyperinflation in the United States? Two points to make here: One, it has never happened. While there were some instances of hyperinflation during the colonial period in US history, that is prior to the Republic and the political and economic environment was quite different. So there has never been a hyperinflation in the United States of America since it’s establishment by the Articles of Confederation. However, and here is the second point, since 1971 we have been on a completely fiat paper currency standard that has never existed until then in US history. So while in the past there was never a hyperinflation that was because one was not possible, today a hyperinflation is possible the question remains how likely is that to occur.
The PaleoSaver approach – In the early Republic Americans saved two ways, by and large. They saved coin, and they saved currency. It was very rare for the average American citizen to own stock or bonds until well into the 20th Century. The coins of the 19th Century were 90% silver and 22k gold. At that time these were not collectibles they were the money of the time. Commonly circulated in exchange for goods and services as had always been the case throughout human history. Only since World War I did that begin to change. In fact the dollar still had some low level of gold backing right up until 1971. The other thing that they saved was currency. Currency was notes that were redeemable for the gold and silver coins that were the money. People traded and exchanged in currency as well, in fact more so due to convenience and that is why it is called currency since the paper notes “circulated” within the economy while the gold and silver sat in vaults for the most part. So the currency acted as money substitutes. A perfectly fine arrangement so long as there remained a 1 t0 1 correlation between the gold and silver coins and the currency that represented the coins. There were two primary ways that Americans saved currency. Through bank deposits that earned interest and through whole life insurance policies that earned dividends. These are the traditional methods. By having some coin and some currency Americans of an earlier era had the protection of the coins and the earning opportunity of the currency. They could protect themselves from just about any amount of inflation.
Having studied this history I developed the PaleoSaver approach to saving. There are two components: One, saving a real asset such as gold and/or silver or even unencumbered real estate or other commodities and Two, saving currency in Whole Life Insurance a safe place that will earn a far better return then the banks while helping to prevent the inflation that might cause the asset to lose value in the first place. The real assets, gold/silver/real estate will protect you in the event of a hyperinflation and are a good hedge against any level of inflation but gold/silver do not generate an income stream, although real estate might with some investment. So, we hold gold/silver but then we also save currency in a whole life insurance policy which is a dynamic instrument for doing so and generates an income stream that we can utilize for a great many financial needs, and has the added benefit of being an inflation fighter. You can even invest in real estate using your whole life policy to get the liquidity you need without debt financing.
So there you have it, the PaleoSaver approach to saving your money: buy gold/silver and hold it (hedge); buy whole life insurance and use it (self finance and protect). Simple, straightforward and somebody like Benjamin Franklin or Thomas Jefferson would recognize the approach as very familiar.