Achieving Lifetime Growth with Life Insurance
The financial community undervalues lifetime growth and compound interest in particular. While almost all asset managers believe in the power of lifetime growth, their version of “lifetime growth” tends to end around age 62 to 67.
- If you could have an asset within your portfolio that grows at a competitive, consistent rate for your entire life without ever having a down year, paying taxes on gains, or having fees on growth, wouldn’t you want it?
- What if we told you it was also one of the most slandered and “boring” financial products on the market? Are you still interested?
- If you answered “yes” to both, we’d like to introduce you to permanent life insurance, specifically, Whole Life Insurance.
One of the loudest critiques lobbied by whole life insurance naysayers is the comparatively low rate of return of life insurance measured against other investments.
Important Distinction: Life Insurance is not an Investment
Investments carry a degree of risk, and life insurance is about the least risky financial product out there. As long as you hold up your end of the bargain by paying a premium, the insurance carrier is on the hook to guarantee the growth of your cash value and the payout of your contractual death benefit.
Life insurance is designed to mitigate one of the most significant risks of all–dying. While the fear of death is quite possibly the most entrenched fear of all in the human psyche, it’s also the most well-founded. We all will die someday. The question is just, “When?”
Whole life insurance is the only insurance you’ll ever fund that you know with certainty someone will be collecting on in the future. If you’re careful enough, you may never need that car insurance you pay for - but whole life insurance protects against the inevitable that no one can avoid.
Dying before you’ve established a significant financial legacy for your beneficiaries is an uncomfortable thought and a painful reality. Having the government sort through your estate in probate court is a privilege no one wants to endure. The death benefit of life insurance sidesteps this legal step and pays the lump sum death benefit directly to the named beneficiaries. Many wealthy folks consider the death benefit of life insurance as a way to “buy” their net worth. If they know their family will get an income tax-free death benefit when they pass, the fear associated with spending too much money and leaving less inheritance dissipates.
Besides the death benefit, having a non-volatile, well-funded life insurance policy can help you show up more powerfully as it balances out the more volatile investments inside your portfolio.
Life Insurance is a Liquid Savings Vehicle (with a lot of other benefits)
We call life insurance a “liquid savings vehicle.” It has more in common with a high-yield savings account than an investment such as equity in mutual funds or an individual retirement account (IRA).
Still, when you compare overfunded life insurance against most investments, it will perform competitively–if not beat them–at their own game. That’s because the dollars inside the life insurance policy grow in an environment that experiences uninterrupted compound growth away from taxes, growth fees, and volatility.
When we talk about compounding, we need to define compound interest. Compound interest is interest calculated on the initial principle, including all accumulated interest from previous periods. As the principle continues to grow, the interest continues to grow, leading to exponential growth and a hockey stick-like curve as time goes on.
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Most people never experience lifetime growth of their money, so they can’t comprehend what it would look like. Instead, they start withdrawing money from their savings in retirement and stop this compound growth right when it's starting to build the most momentum. That’s because typical financial planners tell us to cash out that retirement money (and for good reason)! In most cases, your financial advisor is planning for you to stop working and live on your accumulated assets for the rest of your life.
Why would you kill the goose when it's laying golden eggs? The only acceptable answer is that you had to do it to survive.
Savers are Losers, Compounders are Winners
Robert Kiyosaki, the author of Rich Dad, Poor Dad, said that savers are losers because the concept of saving money is flawed. The interest you earn at a bank generally doesn’t outpace inflation.
Compounders are winners because they buy assets with a compound growth curve. The growth inside a well-structured life insurance policy is compounded by the accumulation of interest and dividends, which can grow exponentially over the policy's life.
Whole life insurance gives you control, access, protection, and the lifetime compounding growth of your dollar all at once. The best part about compounding growth is that you can access your dollars while it’s compounding without interrupting the growth.
The Liquidity of Life Insurance
While your dollars grow in a tax-favored compounding machine for the rest of your life, you can still access them via a policy loan, keeping that golden goose alive!
With whole life insurance, you can borrow against a high percentage of your cash value (90% to 98%), taking a loan directly from the insurance carrier that collateralizes your cash value. When you do this, you get access to an unstructured line of credit from the insurance carrier's general fund, which has a specific finance charge but is not required to be paid back in a specific timeframe.
When you do this, your cash value in the life insurance does not get removed from the compounding process! Your policy still receives the guaranteed interest plus dividends every year, even when you have outstanding loans.
Why does this work?
Remember, the insurance company is on the hook for a much more significant death benefit. So if you borrow $50,000, and your death benefit is $750,000, the carrier knows that if you never pay that loan back in full before you die, they can take an immediate deduction against the liability side of their balance sheet.
This relationship gives you the flexibility of naming your repayment timeframe and frequency.
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Why is Uninterrupted Compounding So Powerful?
To answer this question, let’s do a thought exercise: Would you rather have $1,000,000 today or a penny doubling daily for the next thirty days?
Ok, smarty pants—yes, the penny wins. Let’s see why, and we will also examine what happens if we interrupt that compounding even the slightest bit. To make this more applicable to the conversation, let’s assume the penny doubles every year for thirty years.
If you had one penny and could get its value to double every day for thirty years, you would end up with $5,368,709.12. Amazing! This is an example of why compounding money without interruption is essential.
To illustrate the characteristics of most asset classes, let's use the following interruptions to show how fees, taxes, and losses affect money over thirty years. Let’s assume each interruption is separate, meaning that we assume that only one of the following interruptions would affect your penny at any one time.
- Fee: 1% charged every year on the balance
- Tax: 10% charged every year on the growth
- Market Losses: The penny won’t double in years 5 and 15
At the end of thirty years, with the interruptions above, here are the results:
- Fees: The 2% fee cost you $1,357,359.48, with an ending penny balance of $4,011,349.64
- Tax: The 10% tax cost you $121,298.23 in taxes paid, with an ending penny balance of $1,212,982.20
- No Growth: The two years of no growth cost you $4,026,531.84, with an ending penny balance of $1,342,177.28
If those three interruptions had happened simultaneously over thirty years, you would have no more than $57,721.83 - combining the losses from taxes, fees, and two years of no growth.
Compound interest can work in your favor, but it is only the “eighth wonder of the world” if it can compound with the right conditions. By and large, most financial plans assume averages to project a mythical future value of epic proportions. What is often omitted in those graphs are things like:
- How fees strip the potential earning power of every dollar you put into the system.
- How taxes affect those dollars year to year or when you want to use them.
- How negative years will be made worse by taking distributions when the market is down.
The ideal setting is one where growth is uninterrupted, untaxed, and free of fees. The icing on the cake would allow you to simultaneously use your money without interrupting that compounding growth. Is this starting to sound familiar?
Personalized Insurance Quotes
Whole life insurance will not solve all of your problems, but it’s a safe place to store liquid assets and still earn a competitive rate of return.
If you want to crunch some personal numbers on how uninterrupted compounding can work for you, use this link to use our And Asset Calculator. FYI: For whole life insurance, the carriers we work with project long-term returns between 2.5% and 5% depending on age, gender, health, and policy structuring. If we optimize for cash value, most people’s policies fall into the 3.5% to 4.5% range.
If you’d rather we do the work for you, connect with our team for personalized whole-life policies.
