Wholly Appealing: The Planning Benefits of Whole Life Insurance for HNW Clients

Wholly Appealing: The Planning Benefits of Whole Life Insurance for HNW Clients

My father was a straight arrow, as true flying as they come, but he wasn’t without his New England oddities.

I’m not talking about his nectarine addiction or his persistent insistence that women couldn’t make it as tail gunners. No, it was this: he didn’t mind paying taxes. All families have their skeletons.

It was a kind of munificent patriotism, I think. Born in 1916, he’d seen it all, Depression and war, economic expansion that raised up our family and millions just like us, while spotlighting those left behind. Dad didn’t like it, made his bucks talk to help others, assumed the government was thinking the same, using his tax dollars wisely. Hmph, says his once young-at-heart, now grizzled, thrice-bitten son. If father-figure was around, it’s nice to know we’d still have some pithy points to argue.

I don’t like taxes and neither do most of you. Wealthier souls – yes, they have them – with substantial, complex estates and the need for legacy – that is, to preserve their lives’ work and take proper care of heirs – are commonly seeking personalized ways to reach their estate planning goals. Tax mitigation is ever a concern and whole life insurance, sometimes in, other times out of fashion, can be an excellent tool for preserving a family’s heritage.

Whole life insurance is one of the usual suspects in the permanent life lineup. Its main partner in assurance is universal life, and it makes sense to compare their features as we go. Both offer life-long protection (for universal, as long as it has a net surrender value) – keep paying your premiums and you’re covered. Both policies feature a cash value account, one of the key draws of permanent life. In whole life, the cash account grows in line with a schedule, while a universal policy’s account gains or dips in tandem with money market rates.

Premiums and death benefits are where they crucially differ. Whole life premiums are fixed over the policy’s life, as is the death benefit. In universal coverage, premiums and DB are flexible, rising and falling as the customer dictates. We like both types, naturally, depending on the client’s needs. Today, we’ll examine whole life, as it offers particularly slick advantages to HNW customers wishing to limit taxation and the volatility inherent in long-term planning.

According to LIMRA, the global research and consultancy agency, whole life still accounts for one-third of the individual coverage market, despite a two-decade decline in popularity. One set of critics I’m reading say that whole life, the “grandaddy” of personal insurance, is losing favor because agents simply don’t know how it works and can’t empower their clients.

Fee-only agents don’t make a penny from selling permanent policies, which the critics say explains their declining usage. Still, LIMRA’s stats don’t lie, so somebody out there still has the instruction sheet. Let’s crib from them and spread the knowledge.

Whole life’s first advantage is the guaranteed death benefit. DBs suffer from their oxymoronic name, yet when embraced with dispassion, we will learn that it can solve infinite dilemmas, particularly the ‘who gets what’ quandary that so troubles rich moms and dads in all eras.

If the creators of those wonderful assets want to enjoy them in retirement, and perhaps establish a trust or two for charitable causes, they may fear the post-partem wrath of children, siblings, once-bosom friends and all others crowding in, deserving or not, with their hands out. A whole life death benefit – tax-free to recipients – provides a guaranteed reward to those worthy or otherwise. See paragraph two above for cynicism disclaimer; whatever my bias, your wealthy clients are assuredly concerned, and the whole life DB provides an assured solution.

The death benefit can work contrarily, too: assets can be put aside for heirs – the eldest gets his favorite beachfront property, younger sis gets a rich securities portfolio, deadbeat junior receives a trust as a ghostly handshake – while the death benefit covers any estate taxes. The latter aren’t much of a worry right now, given the elevated exclusion, yet President Biden is in his White House, biding time for the opportunity to cut, slash and then boost. Well, we’ve been warned. The thing to do now is prepare.

Whole life policyholders love the fixed premiums, and the uninitiated wonder how that could work. As with all insurance, it’s best to start young – not necessary, though it moderates that high premium.

That monthly payment is split into two portions: one covers mortality protection costs, the other, the lion’s share, the insurer places in a general account and invests. The general account’s growth covers the rising coverage cost that occurs naturally as the policyholder ages, allowing the customer to pay steady premiums over a potentially very long life.

The whole life policy’s cash account is created via the insurer’s investment activity, too, and it grows in relation to their success. That growth is tax-free and it forms a living benefit, meaning the policyholder can access it via loans or withdrawals in any emergency. This feature’s value has been nailed to the mast during the Covid emergency, as it saved innumerable policyholders from being forced to sell assets, at the worst possible time, to gain vital liquidity.

Tax-free compounding over the very long term is perhaps whole life’s key advantage over the splendid array of equity investment funds competing for HNW customers. There’s no tax bill for the policyholder until the money is withdrawn, and let me repeat, that death benefit is handed to heirs tax-free.

Whole life insurance is more expensive than term life, yet when the tax benefits are measured, it’s advantage-policyholder, particularly in cases of good overall health and a wise early start. It’s a smart tool worth considering when planning for all wealthy clients.

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