An ‘Adults Only’ Financial Strategy


Most financial advice reflects a cautious, balanced perspective. You’ll hear statements like: Don’t put all your eggs in one basket. Diversify. Borrow, but don’t take on too much debt. Take risks, but have some guarantees as well. Think long-term. And short-term, too.

You get the idea. So, when someone comes along with an approach that seems, well, unbalanced, there will be a few raised eyebrows, usually followed by “I don’t know…that sounds pretty drastic.” And for many, the conversation ends right there.

But some people, when they take the time to get to the whole story, end up saying, “Y’know, that isn’t as crazy as I thought.”

The following example illustrates just this type of approach. And if you can get past the initial raised eyebrow, it’s not as outrageous as it sounds.

A Strategy for Financial “Adults”

A 40-year-old dentist earning $150,000 a year has accumulated $200,000 in several saving and investment accounts, primarily through a plan of systematic monthly saving (currently $1,500 a month). Looking for a second financial opinion, and on the recommendation of a friend, the dentist meets with a financial professional to discuss his current situation and perhaps consider some new approaches.

The financial professional reviews other aspects of the dentist’s financial life, such as debt, insurance protection and cash reserves, as well as personal objectives besides retirement. A week later, they meet to discuss possible alternatives.

After a brief intro, the financial professional says, “You know, you might consider putting all your ‘new money’ into a whole life insurance policy.”

And the dentist, who is married, has three children and already has $3 million in term life insurance, says, “I don’t know…that sounds pretty drastic.” And the conversation ends right there.

No wait! There’s more to the story. And as you dig into the details, there are good reasons to give this idea a closer look.

Reason #1: The dentist is a financial adult. An all-in commitment to funding a whole life insurance policy is probably not suitable for someone just starting a career and beginning to save and invest for the future. But the dentist isn’t a financial newbie. His professional and financial success make him eligible for this recommendation.

First, the dentist has an established career, and can reasonably anticipate another two decades of steady, and perhaps increasing income. Unless something catastrophic happens, he is going to accumulate a substantial fortune.

Second, he has demonstrated the discipline to save. It is reasonable to assume he will continue to save in larger amounts as income increases and/or obligations decrease.

Third, a financial foundation is in place. He has assets other than his income, and doesn’t need to build an emergency fund.

Reason #2: It’s not all money, just “new money.” The recommendation involves only “new money,” that is, the $1,500 of additional saving that is set aside each month. Existing accumulations (“old money”) will not be touched; they will remain invested as before, to presumably grow as before.

Also, any new money in excess of $1,500/month can be allocated to new or established accumulation accounts. In other words, the term “all new money” really applies only to this year.

Reason #3: It’s not forever.1 This commitment of all new money to funding a whole life policy doesn’t have to continue forever. Details will vary depending on the structure of the policy, but once cash values reach specific levels, the dentist may exercise options to reduce or suspend premiums, while maintaining the benefits.

Reason #4: The benefits are substantial. Here are some of the long-term benefits the dentist achieves by adding a substantial, fully-funded whole life policy to his financial program:

  •  A permanent death benefit.2 Especially for those with substantial assets, a life insurance benefit guaranteed to be in force at death—at whatever age that might occur—can be a tremendous complementary asset. The certainty of an insurance benefit may allow other assets to be spent/enjoyed, protect legacy assets from liquidation, provide funding for inheritance or defray long-term care and/or end-of-life expenses. Some individuals wait until retirement to obtain permanent life insurance, but this is a gamble, contingent on continuing good health. Better to secure the benefit now than hope to still be insurable later.
  •  A disability waiver of premium rider.3 This ensures that $1,500/month in premiums will continue to be paid in the event of a qualifying disability. This waiver preserves both the insurance benefit and cash value accumulations. While a good disability income insurance program can replace a high percentage of one’s earnings, and maintain one’s present standard of living, waiver of premium is a way to ensure that saving for the future continues as well.
  •  Lawsuit protection.4 People with assets have the greatest risk of losing them through legal proceedings. In many states, cash values inside a life insurance policy are protected from creditors, particularly if a spouse or children are named beneficiaries, and the policies have been in force well before litigation is initiated.
  • Tax advantages. Cash values accumulate tax-free, and can be withdrawn tax-free up to the policy’s basis, or taken as loans with liberal repayment terms.5 Death benefits are usually tax-free to beneficiaries, which may be used to maximize inheritance and estate-planning distributions.
  •  Liquidity. Cash values accumulate according to a pre-determined schedule, and are typically enhanced by dividends.6 The result is a steadily growing liquid accumulation—which can be accessed through loans/withdrawals5—that, as one life insurance professional puts it, “never has a bad day.” Over longer holding periods, the historical rates of return on cash values are competitive with other conservative asset classes, while arguably less volatile.
  •  Removes the almost-certain financial loss in term life insurance. The only “win” in term insurance occurs if the insured dies well before life expectancy; the far more likely outcome is several decades of premiums for a benefit that will be surrendered. The financial impact is not only the premiums paid, but the opportunity costs, as well as the forfeiture of a death benefit that could have added many of the advantages listed above.

In this example, a decision to commit all new money to a whole life policy is a brief “time out” from other saving to ensure improved financial protection, balance and options going forward. The strategy isn’t as unbalanced as it may have first seemed. Rather, it’s a way to maintain financial equilibrium at a higher level. If you’re a financial adult with an established career path, discipline and existing accumulation, having a financial professional prepare a personalized evaluation of how whole life could protect your future and enhance your results could be enlightening.

1. The premium offset year is not guaranteed and relies on the payment of non-guaranteed dividends and the amount of paid-up additions in the policy in order to pay for the policy’s required premium.

2. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

3. Disability waiver of premium rider will incur additional premiums.

4. State creditor protection for life insurance policies varies by state. Contact your state’s insurance department or consult your legal advisor regarding your individual situation.

5. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10 percent federal tax penalty.

6. Dividends are not guaranteed. They are declared annually by the company’s board of directors.

This article is prepared by an independent third party. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary; therefore, the information should be relied upon when coordinated with individual professional advice. The reader should discuss any financial strategies presented here with a licensed financial professional.