Recent developments in investment markets and the resulting poor performance have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.
Whole Life is a permanent insurance contract with level lifetime guaranteed premiums and tax advantaged cash value growth. If the contract also pays the policyholder annual dividends the contract is referred to as participating. These dividends can be taken in a number of different ways but the option used to provide the maximum tax advantaged growth is “paid-up additions”. In a participating policy, there is one investment called a “participating account”. From this account certain expenses and taxes are deducted along with death benefits paid to beneficiaries. In addition to the annual premiums of policyholders, investment gains and other income (such as policy loan interest) are credited to the participating pool. The assets of the participating pool are professionally managed and largely in fixed income investments. Management fees are extremely low (one company charges 0.072% management fee) and the funds have very little volatility. This combination of guaranteed cash value and the non-guaranteed portion from dividends grows tax-deferred and, if paid to the beneficiary as a consequence of death, is tax-free.
During the life time of the insured, the cash values can be accessed by way of partial or total surrender or policy loan. Income tax may be payable as a consequence. One alternative to avoid paying income tax is to use the policy as collateral and borrow from a third party lender. If structured properly, the interest on this loan may be tax deductible. The loan payment is not taxable.
The tax advantaged steady growth, combined with the significant estate benefits to the beneficiaries upon death are the primary reasons why Whole Life (particularly Participating Whole Life) is now being viewed as a new investment class. Unlike other accumulation policies (such as Universal Life), mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made (and once made, increase the value even further). As a result these policies are being favourably compared to a long term high yield bonds. Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed income investments, such as bonds, term deposits, etc. Many investment managers suggest one third to 40% of an investment portfolio be in these types of investments for balanced growth and reduced overall volatility. Including participating whole life in that portion of the portfolio can produce some significant results.
| Male, Non-smoker, age 50 | |||
| Investment Option 3.5% fixed income | Whole Life Option $1,5MM policy | Required interest rate to match this value | |
| Annual deposit for 20 years | $50,435 | $50,435 | |
| Liquid Value after 20 years | $1,250,000 | $1,443,512 | 5.86% |
| Estate Value after 20 years | $1,250,000 | $3,390,000 | 18.69% |
| Value at age 75 | $1,380,000 | $1,912,731 | 7.18% |
| Estate Value on Death at age 85 | $1,682,000 | $5,313,382 | 11.5% |
With results like these it is no wonder that Whole Life is now being looked upon as a new investment class. For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same enhanced returns but also provides opportunities for Capital Dividend Account planning. Whether investing as an individual or via a corporation, the results that can be achieved by using Participating Whole Life are worth investigating.