Property insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for London in 1667."[4] A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance company, the "Insurance Office for Houses," at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his Insurance Office.[5]
2Partial withdrawals and surrenders from life policies are generally taxed as ordinary income to the extent the withdrawal exceeds your investment in the contract, which is also called the "basis." In some situations, partial withdrawals during the first 15 policy years may result in taxable income prior to recovery of the investment in the contract. Loans are generally not taxable if taken from a life insurance policy that is not a modified endowment contract. However, when cash values are used to repay a loan, the transaction is treated like a withdrawal and taxed accordingly. If a policy is a modified endowment contract, loans are treated as a taxable distribution to the extent of policy gain. On a modified endowment contract, loans, withdrawals and surrenders are treated first as distributions of the policy gain subject to ordinary income taxation, and may be subject to an additional 10% federal tax penalty if made prior to age 59½. Loans, if not repaid, and withdrawals reduce the policy's death benefit and cash value.
Thanks for the insightful article. I agree with the general statement that, in a vacuum, it is better to “buy term and invest the difference.” However, I’m interested to hear your thoughts on using whole life insurance as an investment vehicle in the context of the infinite banking model (assuming you are familiar with the concept). From what I understand, it sounds like a good way to achieve predictable and guarenteed growth on a compounded basis while allowing you to borrow money from your own policy and pay yourself the interest, all while always having access to the funds. I think it might be wise for people, like myself, are looking for guaranteed growth with little risk.
The first is that, as you say, no one invests all their money at the beginning of the period and cashes out at the end. Usually you invest some at the beginning and more at various points along the way. For example, someone who contributes part of their monthly paycheck. And since the stock market generally goes up, that means that you will inherently get lower returns than if you had invested all of your money at the beginning, simply because some of your money will not have been invested for the entire ride.
Independent Agents - Independent insurance agents function identically to insurance brokers in that they represent multiple insurance carriers. The primary difference between brokers and independent agents is that insurance brokerage companies are often larger than independent insurance agencies. However, independent agents and brokers approach the business in the same way, which is that they represent the customer.
First of all, it’s important to understand that while the death benefit is certainly valuable, it is not technically an “asset”. The asset that you can include on your balance sheet with a whole life policy is the cash value. The only way you get the death benefit is by dying, so it is not an asset you can actually use today. Again, that doesn’t mean it’s worthless, it’s just not correct to compare it to money in a savings or investment account.
This isn’t entirely accurate. Whole life insurance isn’t a product designed to replace term insurance. It wouldn’t make sense to have a retirement account disappear in the event of someone passing early. This would be irresponsible on the part of an agent to suggest this. Whole life has to be used with the intent of using it as collateral for loans, enhanced retirement and for leaving a legacy. In the early years it should be set up with a term rider to ensure a family’s needs will be met. Yes this is more expensive but it is a tool with an objective and if that’s not the objective then whole life makes no sense at all. It is not right for everyone.
Back to guaranteed growth…. Whole Life policies are interest rate driven based on the economy, but your “Cash Account” will increase every year, regardless of the market. Compound, tax-free growth. The dividends paid to the policy owners are also not taxable. Dividends are not guaranteed, but take a look at the dividend history for companies like Mass Mutual, Penn Mutual and Guardian. They might as well be guaranteed.

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Save your money… don’t invest it… unless you’ve first insured that even if those investments don’t work out. Life is a big enough investment as it is… especially if others are dependent on you and particularly if you become wealthy. Term insurance won’t cut it. It will almost certainly be lapsed by the time you really need it. Too many opportunities over a lifetime to miss a payment and then poof… it’s gone.
Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein savings can increase without taxation until the owner withdraws the money from the policy. In flexible-premium policies, large deposits of premium could cause the contract to be considered a modified endowment contract by the Internal Revenue Service (IRS), which negates many of the tax advantages associated with life insurance. The insurance company, in most cases, will inform the policy owner of this danger before deciding their premium.
Thanks so much for the great article! My husband has a whole life insurance plan that was set up for him by his dad when he was a teenager, so he’s always had it. It’s expensive, though, and we’ve often talked about discontinuing it because it’s so pricey. Still not sure what the best route to take is, but I appreciate the very informative article!
Matt; Thank you for the thought provoking information you have taken the time to post here. My question: I am 66 and my wife 54. We got a whole life policy several years ago. We wanted insurance that would extend into our 70’s and 80’s (if we are so blessed), because we experienced how end of life costs for elderly parents can add up and be a possible burden to the children. we also want the surviving spouse to be assured of not being cleaned out financially. When I looked at the numbers; Cash value plus death benefit plus a long-term care rider, it seems to be a pretty good return, after all, we know for sure that we will die. I am not aware of term insurance policies for people much past the age of 70 for $200,000 or more. Am I looking in the wrong places or is my think askew? 

Finally, IF you decide that these are not the right policies for you, it’s generally better to cancel sooner rather than later in order to minimize the amount of premiums you pay. You should even look at your policy to see whether you’re still within an initial period where you could get all your payments back. Again, I’m not saying that you should cancel, just that if you do want to cancel it’s better to act quickly.

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So what happens at 65 or so after the term policy ends? It will renew but at what rate? What if the payout isnt enough to cover funeral costs and any remaining debt? The average American can barely retire and be comfortable let alone have enough money stashed away in a bank or in investments to help with any costs or debts after he/she has passed away. Term life is great for those who have had good careers most of their life and have a nice savings and investments to cash in on in the later stages of life. Unfortunately, that is not the average American. You only presented one side of the coin.
First, there are your regular whole life policies that are non-{articipating and then there are those that are Participating. Participating policices earn dividends which is called a “return of premium” however with that dividend it purchases more insurance and the coverage keeps going on as long as a dividend is paid, the more coverage the more dividend, the more dividend the more coverage etc. After 25-30 years a person can stop paying for the policy and take reduced paid up insurance and keep the insurance enforced for the rest of their lives without paying a single cent. This is one of the features I absolutely love about participating whole life.
Fifth, if you have maxed out all your tax-advantaged investment accounts, you are on track for all your other financial goals, you are able to enjoy a lifestyle that makes you happy, and you still have money leftover, then yes, some kind of permanent life insurance policy could possibly make sense. But it would need to be a policy that was specially designed to minimize fees and maximize growth, and you need to work with a certain kind of agent in order to have that done.
Any reputable source will report mutual fund and stock returns as “annualized” figures, which takes the sequence of returns into account. Another term for this is “geometric average”, which again accounts for the order in which returns are received. So while there are some financial “experts” out there touting average returns (cough, Dave Ramsey), for the most part what you’re talking about here is not a factor.

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Hey Jordan. I was a little dismissive in my last reply, and I want to apologize for that. You’re absolutely right that the main reason for getting life insurance is often to make sure that your kids would have enough money even if you weren’t around, and it’s honestly great that you’re already thinking that far ahead. It bodes well for you and your family.
I have a Dividend Option Term Rider that will expire soon. I am 57 years old. New York life wrote to me stating I can change over to whole life insurance without having to answer health questions or take a physical exam. What are the advantages or disadvantages of this for someone of my age? I currently have a 401K. Would my money be better invested in that or elsewhere? Thanks.

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