As you go through life, you’re likely to have many financial goals: saving for retirement, paying for your child’s education or wedding, or having enough for emergencies. And for each of these goals, you probably rely on a specific financial product to help reach it.
Here's the rub: While each product provides an efficient way to reach the goal it’s designed for — a 401(k) as a tax-advantaged way to save for retirement, for example — it’s also very likely that it isn’t flexible enough to help reach other goals. If you try to pay for your child’s college tuition using the money in your 401(k), you’ll owe taxes and a penalty.1
There is, however, a product that is flexible enough to help you reach multiple goals: whole life insurance. While many people view it primarily as a way to leave something behind for your loved ones after you’re gone, truth is, it can be a key financial utility player when used in conjunction with other financial products.
Here’s how whole life insurance can be an effective way to help meet many of your financial goals, even as they change over time.
PROVIDING FOR YOUR FAMILY IF YOU PASS AWAY
Many people meet this goal with term insurance. Term insurance, which offers a death benefit for a period of time, can be the most cost-effective way to get the largest amount of coverage. But term insurance only offers a death benefit, meaning most people pay their premiums for years and get nothing more than the peace of mind that if something were to happen, their family would be covered. With whole life insurance, you get that peace of mind plus the additional value a whole life policy can provide beyond the death benefit.
PROTECTING YOUR INCOME FROM DISABILITY
If you’re ever disabled and can’t work, disability insurance can help you pay the bills. But with the waiver of premium benefit on a whole life insurance policy, whole life insurance can also help during a disability. That’s because during your disability you won’t have to pay the premium on your policy. And while you’ll have one less bill to pay, your cash value will continue to grow in the same manner as if you were still making payments, keeping you on track for other financial goals.
GROWING YOUR MONEY OVER TIME
There’s no question that stocks are one of the best ways to help grow the value of your money over the long term — historically, they have outperformed many other types of assets. When you’re saving for retirement, add in the tax advantages you can get with an IRA or 401(k), and they become a great way to build your nest egg.
The real value of whole life insurance isn’t its ability to help you meet any single goal, but its flexibility to help you meet almost any goal as your needs change.
But we all know that stocks can be a bit of a rollercoaster. That’s why most portfolios include a percentage of more stable (but slower growth) assets like cash and bonds. Because whole life insurance cash value is guaranteed to grow and never decline, it can also eventually play the role that bonds would in your overall portfolio. That can allow you to keep more of your investment dollars in stocks, resulting in more potential for growth over time.
SAVING FOR AN EMERGENCY
In most cases, it’s a good idea to have six months’ worth of expenses set aside for an emergency like a job loss or a big home repair. Ideally, this money should be in a checking or savings account, which ensures that it’s readily available when you need it. But that can also mean that you’re earning next to nothing on a sizable amount of money. Because the cash value of whole life insurance never goes down and is easy to access, you could eventually consider some of your cash value as emergency funds. That could eventually allow you to keep less money in savings or checking — perhaps putting it to work in investments instead.
SAVING FOR COLLEGE
When you’re saving for college, a 529 is an efficient way to go because you’re getting tax advantages on the money you invest for your child’s future college costs. But with a 529, you’ll pay a penalty if you don’t use the money on qualified education costs. Whole life insurance also offers tax advantages, and it’s one of the few assets that’s not factored into federal financial aid calculations.
LIVING COMFORTABLY IN RETIREMENT
When you get to retirement, you’ll typically have two key financial goals: generating reliable income with your savings and leaving behind a legacy. Whole life insurance can help with both.
Generating Retirement Income. Most people will live off investments in retirement, which is great when the market is performing well. But when the market declines, you’ll have to withdraw a larger portion of your investments to get the same income you would need to live. During a recession, that can take a big bite out of your portfolio. Since the cash value of whole life insurance never declines, it can be a great source of income during those down years.2 Then when the market does recover, you can switch back to withdrawing from your investments.
In addition to helping you weather down markets, whole life insurance can help you be more tax-efficient as you generate your income. That’s because you can withdraw the basis that you paid into your policy tax-free. If you borrow against your policy, the money isn’t taxed so long as the policy stays in place. That can help you avoid crossing into a higher tax bracket in retirement if you need extra income in a given year.
Leaving a Legacy. The death benefit of a whole life insurance policy easily passes to your beneficiaries. Knowing you have a death benefit that will leave behind a legacy can free you to spend down other assets.
People are quick to criticize whole life insurance by comparing it directly to other financial products. Because whole life insurance is both life insurance and accumulates guaranteed cash value that never declines, it’s tough to make such a direct comparison. That’s because the real value of whole life insurance isn’t its ability to help you meet any single goal; the real value is its flexibility to help you meet almost any goal as your needs change.
When combined with other financial products, many people find whole life insurance can help them be more efficient overall with their financial plan. It becomes the cornerstone because it’s the one financial product that can efficiently help you achieve so many goals.
1 If you withdraw money from a traditional 401(k) prior to 59 1/2.
2 Borrowing or withdrawing money from your accumulated cash value will reduce your death benefit.
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