Whether it's due to increasing premiums, complicated policies, denied claims, or misaligned incentives, insurance can be a highly controversial industry for Americans. You've likely experienced any number of issues or headaches with your health insurance, auto insurance, home insurance, and even some types of life insurance. However, Whole Life insurance is entirely different, and we're going to explain why.
Increasing Premiums
Whole Life insurance has fixed premiums. We could stop right there since that differs from basically all other forms of insurance, but it's important to understand why this is the case. It starts with the Federal Reserve's desire for inflation. But wait, isn't the Fed actively trying to push inflation down? Maybe NOW (temporarily) after destroying what was left of the middle class, resulting in public outrage. But let's look at their own words over the past decade. These are all recent Fed officials complaining about inflation being too LOW:
Pushing prices higher means the value of the insurance company's claims is higher. While some of these companies may be focused on rewarding shareholders (more on that later), our main point is that higher premiums aren't because of "greed." It's because the things they are insuring (vehicles, homes, healthcare, etc.) cost more to produce due to inflation. Since insurers largely invest in safer, fixed-income assets like bonds, which don't do well in inflation, the insurance company is left with two options: Invest in riskier assets, thereby reducing the ability to safely pay out claims, or charge higher premiums.
Whole Life insurance is different. Home prices can change rapidly year-over-year, but death benefits don't. If you sign up for a $1M Whole Life policy, 5% inflation isn't going to require the insurance company to pay out $1,050,000. While one might initially think this is a disadvantage to policyholders, this also means that the insurance company doesn't require higher premium payments either. They actually become easier to pay for policyholders over time. However, after expiring, term insurance premiums increase when renewed because the policyholder is much older, and therefore, the probability of a claim is much higher. The same can be said for IULs, which have an annually renewing term component built in.
Furthermore, mutual life insurance companies pay out dividends to policyholders. When price inflation began to spike in 2021, the insurance companies weren't broadly increasing dividends. However, fixed-income rates increased (investors demanded more return with higher inflation), and as a result, insurance companies began increasing their returns by investing new premium dollars in these higher-yielding assets. We've now seen insurance companies increasing dividends across the board. In the very short-term, premiums aren't guaranteed to increase, but in the long-term, dividends may largely mitigate the impact of inflation (like it did in the '80s), especially if those dividends are used to buy more insurance via PUAs (Paid-Up Additions) to keep cash value compounding. This is how we structure policies for Infinite Banking, allowing capital to compound over time.
Additionally, we aren't telling people to simply SAVE all their money in a whole life insurance policy. A small portion may be used to save (still more attractive tax-free growth opportunities than bank accounts), while another portion is meant to be used to finance purchases more efficiently to reduce amortized interest expense and eliminate bank liens on your assets. However, cash value can also be leveraged to invest in assets like businesses, equities, real estate, precious metals/commodities, or any other attractive investment opportunity.
Complicated Policies
Auto insurance, home insurance, and especially health insurance may have multiple layers of coverage (liability, collision, hospitalization, prescription drugs), varied cost structures (premiums, deductibles, co-pays, co-insurance), network restrictions, benefit limits, and regulation. However, with life insurance, you pay premiums, and unless your death falls under one of the exclusions (i.e., suicide after the first couple years or from dangerous activities that were noted in your contract), your beneficiary receives the death benefit.
Please note that while Whole Life insurance contracts are very simple, other forms of life insurance such like Universal Life are far more complex as shown in the screenshot below from Wikipedia.
Now, with Infinite Banking, we do get creative and use PUAs to provide the policyholder with early cash value liquidity to leverage up front, but PUAs (paid-up additions) are simply buying more paid-up insurance. It's not some complicated policy rider that takes equity market exposure or ties your growth to an external index. It's buying more of the same - permanent whole life insurance. The nuance isn't in WHAT we're buying - just how we buy it, and we take the burden away from clients when designing these policies.
Denied Claims
The difference between permanent life insurance and virtually all other forms of insurance is that the question isn't if the claim will be paid out, but when. Note that only about 1% of term insurance policies pay out, which means the insurance company isn't expecting to pay out a claim. However, with Whole Life insurance, unless someone found a way to avoid the inevitable (please share), we're all going to die, and the insurance company is very well aware of this fact. Again, there are exemptions to life insurance claims stated in the contracts, but you're either alive or you're not. This is more complex with partial claims through health insurance, for example, or those in which multiple parties may dispute the percentage of a claim (i.e., an auto accident).
It's also worth stating that while insurance companies may fight claims, and many do, this isn't great for their reputation. They are banking on new customers each year, so they should be very selective. However, life insurance claims are relatively very cut and dry, and the insurance company is expecting to pay out death benefits on Whole Life policies.
Misaligned Incentives
Whole Life insurance from a mutual company is virtually the only kind of insurance in which additional risk is NOT placed back on the insured. Once you're insured, you're insured for life. Other forms of permanent life insurance like IULs may have you insured for life, but if returns are subpar or insufficient to cover the rising cost of insurance later in life, the insurance company may increase your cost of insurance. This isn't a huge deal with newly issued policies for someone younger, but it can really take a toll for older policyholders who may be banking on cash values to fund retirement.
Additionally, non-participating life insurance companies, and many other shareholder-owned companies, are looking to reward shareholders. Taking care of policyholders isn't necessarily the top priority. However, with Whole Life insurance from a mutual company, policyholders are the customers, and therefore top priority. Incentives are aligned.
Lastly, with things like health insurance, there's a self-interested third-party: the hospitals. Hospitals frequently charge more than the cost of care to ensure higher reimbursements from insurance companies. Additionally, they are incentivized to provide more tests, treatments, and procedures, which your insurance will have to pay for. As a result, this may drive profits higher for the medical providers, but it drives the cost of insurance higher for the insured.
Conclusion
Dealing with insurance companies can be frustrating, but Whole Life insurance from a mutual company is different in many ways. Premiums are fixed, and longer-term policies have historically done a nice job at protecting against inflation. The policies themselves are shorter and very straightforward. And if you're a Whole Life insurance customer with a mutual company, you are a partial owner of the company, legally entitled to the company's net profits (after expenses, claims, reserves, etc.) in the form of dividends. Lastly, your insurance company is expecting your claim to be paid out. Where else can you say this with any other form of insurance?
Comments