Exploring whole life insurance as a dual tool for lifetime coverage and wealth accumulation

Life insurance is a highly regulated financial product sold and marketed in the form of modified indemnity contracts. The goal of insurance is to provide certainty and protection against adverse events, with the insured paying a premium to transfer risk of loss to the carrier in exchange for a guarantee against loss of income or wealth due to death. Beyond providing certainty against catastrophic loss, life insurance can be used as an investment tool and provide the policyholder with a means of disposing of his estate and paying estate taxes. Whole life insurance has both investment and risk transfer characteristics. The death benefit can provide your heirs with much needed liquidity upon your death; the premiums subsidize the underwriting loss experienced due to the risk transfer; and when needed, the policy cash value can be accessed as a source of lifetime funding. Life insurance provides lifetime coverage and wealth accumulation at a higher cost than term insurance with savings outside of the policy. A policy’s investment feature makes the policy economically comparable to a bond. By complying with minimum liquidity requirements set by regulators, a whole life policy gains a cash value that grows in a tax favored manner, equal to the future value of a corporate bond. The cash value attracts fund flows and begins to support sales and expense ratios when sufficient to support minimum liquidity ratios. For wealthy and high-income consumers, life insurance offers benefits not available through other investment vehicles; thus, excessive premiums are not viewed as a cost, but rather as part of a tax-preferred financial solution.