Capital in Whole Life Policies

There is too much capital residing inside life insurance contracts to ignore it.

At policy inception, you may not be too concerned about investment return because the premium is small relative to the face amount and the cash value has not had a chance to accumulate to any great sum. However, over the years, the guaranteed cash value of these contracts will accumulate to equal the face amount of the policy at age 95 or 100, depending upon the contract. As policy owners approach this significant level of capital, they are more and more likely to become concerned about what is happening with their money.

For example, my mother is a healthy, active, involved individual at 94 years of age. The whole life policy my father bought for her many years ago now has virtually no amount at risk left in the policy, no life insurance. The death benefit is equal to the policy cash value, which, because she is the policy owner, is her money. The current return on that money is the current dividend paid by the insurance company, which represents a 4.7 percent return on her capital.

Since she elected to take the dividends in cash over the years, she now has received more in dividends than was paid into the policy in premiums. Therefore, the dividends are now subject to income taxes. Is she happy with that return? Are her beneficiaries happy with that return? To put the answer to that question in context, you need to know that my mom and dad retired in 1969, so mom has been economically retired for over 30 years and we are hoping for another 10 to 15 years.

As a result she has experienced the corrosive effects of inflation on her cost of living. Fortunately, her investment capital outside of her Life Insurance Policy was diversified in stocks and bonds, and in spite of the difficult years in the stock market between 1969 and 1982, her asset allocation of about 30 percent bonds and cash and 70 percent equities (stocks) was maintained. As a result, her retirement portfolio has provided for her needs in spite of the cost of living increasing almost four­fold during these years. Diversification, especially investing in equities, is something that she understands is a necessity for retirees to meet retirement needs, and she is frustrated that she cannot diversify the capital in her whole life policy in a similar manner.