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To be honest, I was a bit hesitant to write about this one. After all, life insurance gets a pretty bad rap almost everywhere. And with so many different types and so many different ways they are sold, it’s no wonder. We’re all weary of insurance agents trying to take our money, selling a product that wouldn’t be accessible until something tragic happens to the policy holder. In this way, life insurance seems to better labeled as death insurance, and who wants to put money into that?

However, if we look past all of that and really dig into what life insurance can be for us rather than what it’s often sold as, we get a picture of a valuable, long-term asset. And when talking about being your own bank, and using or managing assets that have a long term growth potential, life insurance, when set up properly, has that exact potential and more.

What Kind of Life Insurance?

It’s important to delineate right now between the kind of life insurance I’m writing about here, and the ones that are often sold to us in television or online ads. In fact, this kind of life insurance is not even really offered by most insurance companies.

Rather, what I’m mainly writing about here is using a Participating Whole Life Insurance policy (from here on out, I’ll be referring to it as PWLI, just to make it easier). I will make a small mention of term insurance later, but that will be in reference to PWLI as well.

This kind of life insurance is very rarely sold due to two things. First, for the most part, the premiums being paid to this kind of policy are a bit higher than that of ordinary Term or even Index Universal Life insurance, and so sometimes require a higher and more consistent income to get started. The second reason is that most insurance agents don’t even know about structuring this kind of insurance, and those that do get a much smaller cut in their commission when selling this. So not only do they not often sell it, but those that do are often incentivized not to.

Since it’s so little known, I’m going to be diving a little more into the details of the important parts of the policy to explain how the policy being built is maximized for our personal banking functions.

Finding the Right Company

I don’t want to give the impression that it’s hard to find companies that can structure and write a proper policy. However, it’s important to understand that only mutual companies offer this kind of insurance. The importance of using mutual companies is that the policies are completely owned by the policy holder, and the companies themselves are also answerable to their policy holders, rather than some board of directors or stock holders.

This means that the profits generated by the company are given to the policy holders, in the form of dividends. However, since the dividends are treated like refunds on their premium, they aren’t taxed as income for the most part. These dividends can then be used for different things, depending on what the policy holder wants.

Cash Value

It’s important to recognize that a portion of the premium being paid into PWLI is going into what is called the “cash value” of the policy. This cash value is what makes the policies tick. Instead of the money being inaccessible, the premiums paid are building up what we can collateralize for as long as the policy exists. If the policy is terminated, the cash value is returned to the holder. If the termination is due to the policy holder’s passing, the cash value and the death benefit are given to the policy holder’s beneficiaries named in the contract.

The policy is also set up so that the cash value within it has a guaranteed growth rate, like compounding interest. If done correctly, the growth rate exceeds the rate of inflation, thus giving us an asset that beats the average rate of inflation. When we collateralize or borrow against the policy, we owe interest to the insurance company (as all loans would). If we want to, we can slightly overpay the interest so that parts of that loan repayment go into the policy’s cash value.

Because we won’t be taking any money out of the policy, the growing cash value compounds upon itself without decreasing. When we overpay the interest, we are able to add into the cash value outside of our premium, which enhances this compounding.

Note that this kind of policy guarantees a rate of return. Insurance agents often prefer selling different types of Universal Life insurance. However, those policies ride the highs and lows of the market, and so they can’t guarantee returns. In PWLI policies, the risks are instead taken on by the companies, while the payouts to the beneficiaries are guaranteed. This makes the policy far better in the long term, since there is almost no volatility involved.

Juicy Dividends

The only real volatile part of the policy is in the dividends that are paid to policy holders. These dividends, as noted before, are the result of profits from the company. And so, since profits can’t be guaranteed, neither are the dividends. However, this lack of profits never eats into the guaranteed growth of the policy’s cash value. Because of this, dividends become more like bonuses that policy holders can use toward different things.

What different things? Well, you can certainly cash them out and use it in your daily life. This is an option that makes the insurance policy like investing into a company and then receiving tax-free income from it. Dividends can also be used to help pay the regular premium owed to the policy, should the policy owner need to do so, and even used to purchase additional coverage in some situations.

However, the most important thing is that you can also use the dividends to add into the cash value of the policy. By doing so, you are adding to the compounding effect of the interest on the cash value. For most policies, the dividends start quite small. However, over time, as the cash value of the policy increases, the dividends do as well. Over the long term, when the policy is used correctly, we have an asset that basically exponentially increases in value.

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