My research into using using whole life insurance both as insurance, savings and an asset, has shown me four things to look for when selecting a company to buy your policy with a focus on growing your cash value. I will share those things with you now.
Tips
- Mutual Insurance Company, because they pay dividends.
- Pick a company that practices direct or non-direct recognition of loans, and how it affects payment of dividend.
- Loan fees. Know what the insurance company loan fees are and are they fixed or adjustable rates during the life of the loan. Learn this before working with a company.
- Company rating A or better by A.M. Best.
Further Explanation of these four areas.
Mutual insurance companies are owned by the policy holders. A mutual insurance company, considers the policy holders to be the company owners. Therefore the company profits at year end go to the policy holders, as a “dividend”. It’s important to understand where this “dividend” actually is from. The insurance company collects premiums from policy holders and uses this money to pay all its claims and business expenses. Whatever is left over from the premiums paid each Calender year is called a profit and is paid to policy holders as a dividend. But technically it is “excess premium”, so the US Tax code refers to these payments as a “return of premium”, Therefore because it is considered a refund of your premium instead of income it’s not taxed. This dividend can be applied to your premium or to the cash value of your policy. The majority of these companies pay this dividend every year. Ten of them have paid dividends every year for 100 years. That means during every financial crisis of the last century these mutual companies have paid a dividend.
Recognition of loans. Mutual insurance companies are either ”direct recognition” or ”non-recognition” with regards to the effect of the loans on your dividend. The companies which recognize loans may reduce your dividend if you have policy loans. Those companies considered non-recognition don’t reduce your dividend if you take out a policy loan. In general, non-recognition companies, which don’t reduce your dividend if you have a policy loan are the most desirable. But loan interest rate is more important, so this isn’t a deal breaker because the difference in the dividend is small, if the company offers lowest loan interest rates.
The mutual insurance companies have differing interest rates they charge for policy loans. It is of course desirable to chose mutual insurance companies with the lowest interest rates. The second, very important part of this is fixed or variable loan interest rate. If the interest rate is fixed you know you expense and your profit using interest rate arbitrage. (Arbitrage means you borrow money at 5% and use it to earn at a higher interest rate.). If the interest rate is variable, if the federal bank increases its rate, you loan interest rate increases and your profitable investment could become a losing or unprofitable investment.
Company rating.
A.M. Best is an insurance rating agency focused on the worldwide insurance industry. Founded in New York City in 1899 by Alfred M. Best, the privately held company is headquartered in Oldwick, New Jersey. Both the U.S. Securities and Exchange Commission and the National Association of Insurance Commissioners have designated the company a nationally recognized statistical rating organization. Best issues both financial strength and issuer credit ratings. The former indicates the company's assessment of an insurer's ability to meet its obligations to policyholders. It takes into account both qualitative and quantitative assessments of the balance sheet, operating performance and business profile. Best has six secure ratings, ranging from the highest A++ to B+, and 10 vulnerable ratings, ranging from B to S, with the lowest indicating a rating was suspended. A.M. Best is the only ratings agency that specializes solely in the insurance industry. Best's short-term credit ratings reflect the company's ability to pay commitments due in less than a year, and they range from a high of AMB1+ to a low of D (in default). Long-term credit ratings reflect the company's ability to pay its commitments maturing in more than a year, and range from AAA (exceptional) to D (in default). Source
Commentary
I am not an insurance agent and you will pay an insurance agent to help you buy your policy. I strongly recommend you read the material at the R. Nelson Nash Foundation site about insurance agents specifically trained in this specific special use of Whole Life Insurance. My research shows that traditional Whole Life Insurance Policies take 5 or more years to accumulate the amount of cash value the policies designed by the agents trained by the Nash Foundation due in one year. It cannot be emphasized enough that these policies are greatly modified versions of the commonly offered Whole Life Insurance policies and those modifications all benefit the policy owner. This information should help you pick a company based on your longterm goals. Please read Part Four for more information on choosing your insurance agent.
✍🏼 by Shortsegments.
References for further reading.
Title: Tips for selecting your Whole Life Insurance company.