Kip Lingers Life Begins at 50

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06/2011 KIPLINGER’S PERSONAL FINANCE

MONEY // INSURANCE»

IF YOUR TERM LIFE POLICY IS ENDING BUT YOUR NEEDS CONTINUE,CONSIDER THE CASH-VALUE ALTERNATIVE. BY KIMBERLY LANKFORD

LIFE (INSURANCE )BEGINS AT 50FOR ANYONE WEARY OF WRITING CHECKS TO PAY FOR

life insurance, retirement used to spell relief. With themortgage paid, the kids on their own, and Medicareand Social Security on the way, common sense suggestedyou could safely let your insurance expire. But now

build, tax-deferred, creating a “cash

value” that you can draw on in a num-ber of ways. For example, you canwithdraw up to the amount you paidin premiums tax-free or you can takea policy loan.

The premiums sound expensive, butif you want insurance for the rest of your life and you have one or more of the following needs, you may want toexplore a life insurance policy that be-gins—not ends—at 50.

G G A STEADY INVESTMENT

Whole life as an investment is contro-versial, but that’s because it takes apolicy many years to show value. Thefirst-year premium largely goes forcommissions and other expenses, soyour cash value will lag the amountyou pay in premiums in the earlyyears. It typically takes eight to tenyears for your cash value to exceed thepremiums you paid. But if you carryon, the results get better—sometimesdramatically. This is a long-term prop-osition. Don’t buy it if you can’t keep it.

From 1991 through the start of 2011,according to Blease Research, a life-insurance data provider in Easton,Pa., the annualized cash value returnsfor representative policies from majorcompanies, such as NorthwesternMutual, New York Life and Thrivent,ranged from 2.62% to 4.44%. Thisamount is tax-deferred and includesthe part of your premiums that go

the insurance company’s generalaccount which primarily invests inhigh-grade bonds and mortgages. Be-cause insurance companies are contin-uously collecting new money and in-vesting it, whole life is among the fewlong-term financial products that maybe able to keep up with and even bene-fit from rising interest rates.

The disadvantage is the out-of-pocket outlays. A healthy 50-year-oldman would pay $13,940 per year fora $500,000 whole life policy fromNorthwestern Mutual. A 60-year-oldbuyer would pay $23,305 per year.(If he bought a 20-year term policyat age 60, he’d pay $2,839 per yearuntil the coverage expired at age 80.)

Because the premium remainslevel as you age, it must be set to ex-ceed the company’s cost of insuring your life during the early years of yourpolicy. The extra amount and the in-terest it earns go into a reserve fund.Part of the fund is used to pay theagent’s commission and the company’sadministrative costs. The rest getscredited to your account. After a cou-ple of years, your reserve begins to

many fifty- and sixtysomethingsdon’t have the flexibility to shortenthe life of their life insurance. Lifeexpectancies are longer, and the ex-penses that the death benefits wereearmarked to take care of are hanging around longer, too. You may be retired,but you haven’t retired your mortgage.Without a pension, your spouse mayneed an extra financial safety net afteryou die. And what if your childrenaren’t self-sufficient?

You could buy another term insur-ance policy if you’re healthy, but thatcoverage could still end before yourneeds disappear. If you want yourinsurance to last for the rest of yourlife—no matter how long you live—thensigning up for a “permanent,” cash-value insurance policy may makesense. In return, you get tax advan-tages and guaranteed cash value accu-mulations—plus a death benefit thatnever expires, if you pay your premium.

Some people will do best withtraditional whole life, with its fixedpremiums and cash value accumula-tion that are backed by—and earn in-terest from and eligible for dividends—



KIPLINGER’S PERSONAL FINANCE 06/2011

3.25%. That may seem low, but theseare conservative assumptions (notguarantees) based on today’s paltrybond yields. Should inflation or inves-tor demand push up bond and mort-gage yields and keep them high, yourpolicy’s cash value would exceed thoseprojections. It was falling interest ratesthat depressed policy earnings during

the 2000s and as recently as last year.

G G A SAFE PLACE FOR YOUR MONEY

Permanent life insurance also appealsto risk-averse people who don’t havetime to recover investment losses inthe event of another financial crash.

Before his term policy expired, Phil-adelphia engineering executive JimArdito, now 58, chose a whole life pol-icy. He planned to work at leastanother ten years and liked the idea

of building up guaranteed cash value.Ardito paid a lump sum of $40,000 fora paid-up $100,000 policy from New York Life when he was 55. He boughtanother $200,000 policy in October2009 and is paying $10,800 per yearin annual premiums. He’s paying extraeach year for the larger policy so itwill be paid off when he retires—which he hopes will be in ten years—and it’s guaranteed to stay in forcethe rest of his life, as long as he contin-ues to pay his premium.

Ardito has other retirement savingsand doesn’t expect to tap the insur-ance cash values soon. He’s contentto bide his time because while hewatched his friends’ investments (andsome of his own) tumble in 2008 and2009, his life insurance stayed out of trouble. “At first, people told me I wasinvesting like an old man,” he says.“But now they think I’m a genius.”

A limited-payment policy—you payhigher premiums for fewer years—isan option that is becoming popularamong preretirees who want to timethe end of their premium obligationswith a retirement date. A ten-yearpayment plan between age 50 and 60costs perhaps twice as much peryear as regular premiums you wouldpay over your lifetime. But by putting more into the pot early, your cashvalue also compounds quicker.

Hunt Valley, Md., advises everyone tohave a comfortable emergency reserveand to fund 401(k) and Roth IRA ac-counts to the max before paying into apermanent life policy.

But permanent life insurance hasa couple of strong suits. The first issafety: Most life insurers survived thecredit crisis and the recession in excel-

lent financial condition. The second isfalling costs: Competition and longerlife expectancies are driving the costof all life insurance policies down, in-cluding for people age 50 and older.

Northwestern Mutual Life projectsthat a 50-year-old man who buys nowand keeps the policy until age 85 willearn 4% tax-deferred, and a 60-year-old who holds on until 85 will earn

to pay for death protection and com-pany expenses. Mutual companiesusually offer the best returns. But it’salso a good idea to see whether youcan convert your term policy to per-manent insurance without changing insurers and without a new physicalexam—especially if you’ve developeda medical condition since you pur-

chased the insurance.Clearly, earnings on life insurance

policies won’t keep up with stocksover a lifetime and certainly not dur-ing an extended bull market. This iswhy just about every financial adviser,including well-trained life insuranceagents, emphasize that insurance isn’tmeant to be your primary investment.Tim Maurer, a financial planner in



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pression?) You can borrow up to yourtotal premiums paid, with no ques-tions asked, by sending a fax or calling the insurance company and requesting a check or wire transfer.

Besides speed, there are two hugeadvantages to these loans: Nobody runs

a credit check or ties the interest rate toyour credit score. And you don’t haveto repay the money on any schedule.There’s also no penalty if you aren’t59½ . Plus, it’s not a taxable event, likea withdrawal from an IRA or 401(k).

Policy loans aren’t a totally freeride. They tend to accumulate interestat 5% to 8%, and your unpaid principaland accrued interest are deductedfrom the death benefits paid to yoursurvivors or from the cash value you

take away if you discontinue the pol-icy. So it’s best not to overdo the bor-rowing. But every insurance agent hasa story of someone who saw himself through a family emergency withoutraiding a retirement fund. You alsowon’t have to beg a banker to approvea loan after you are retired and yourincome is lower.

G G GUARANTEED PROTECTION

Credit and investment issues don’t take

away from the number-one and num-ber-two reasons to have life insuranceat an advanced age: protecting yourfamily, or your business, in the eventof your death, and supplying tax-freemoney to pay estate taxes if your sur-vivors will inherit enough to owe them. You can also guarantee a gift to a schoolor charity in your name by making the organization the beneficiary.

Whole life policies have a lot of confusing moving parts. But, in gen-eral, as your cash value grows, yourdeath benefit can grow, too. Thedeath-benefit projections you seein a policy’s original illustration arenot binding or guaranteed, but youcan be sure that what starts out as a$100,000 policy will pay your familymore than that if you buy it whenyou’re 60 and say goodbye at 90. I

of several start-up companies thatproduced irregular income but endedup being successful. The insurancewas his bedrock. “When you havethat foundation, you can make a lotof choices. Being an entrepreneurialspirit, I could continue to roll the

dice,” he says.Beal has a younger wife and a

13-year-old daughter, so his priorityhas evolved from supporting businessrisk-taking to guaranteeing his wife’sand his daughter’s financial futureafter he dies.

G G AN INSTANT LINE OF CREDIT

Cash-value insurance is also an alter-native to a home-equity line of creditor other sources of borrowed money.

Beal borrowed twice against his lifeinsurance cash values when it tookhim longer than he expected to sella house—and both times he repaid theloan to his policy after he closed thesale. A policy loan can be a source of instant credit. (Remember that ex-

G G DIVERSIFICATION

Cash-value life insurance can alsobe a good portfolio diversifier. That’sbecause a whole life policy is uncon-nected to the securities markets. Youcan think of it as the cash or bondallocation in your overall investment

mix that a llows you to be more aggres-sive with stocks, commodities or realestate in your IRA, 401(k), or taxablebrokerage accounts.

Stan Beal, now 63, first bought asmall Northwestern Mutual wholelife policy when he was 39. He’s addedmore coverage so many times that hisoriginal $50,000 death benefit is now$10 million, and he has built up morethan $1.5 million in cash value. Bealwould have made much more money,

at least for a time, in various stockmarket and real estate booms. Buthe’s content because the stable growthof the insurance cash value helpedhim feel comfortable taking risks inother parts of his life. As a softwareentrepreneur in Dallas, he’s been part

Buy Coverage From the Best YOU’LL PROBABLY BUY PERMANENT LIFE INSURANCE ONCE, SO YOU’RE ENTERING A LONG-

term relationship. For whole life, a mutual company is usually your best bet. As a policyholder,or member, of a mutual, your cash value earns dividends because you “participate” in thecompany’s investment gains and skill (or luck) in selecting risks. The big mutual companies,such as Guardian, MassMutual, New York Life* and Northwestern Mutual, specialize in wholelife insurance and have top credit ratings. Some former mutuals, such as MetLife and Pruden-tial, still sell dividend-paying policies by setting aside a special reserve to pay dividends.

As with any other investment, past performance is no guarantee of future results. But theway that many people compare insurance offerings—by looking at hypothetical projectionsof cash values ten, 20 and 30 years ahead—doesn’t make sense because these projections(known as illustrations) are not guaranteed. Some insurers have been known to issue inflatedillustrations based on impossibly optimistic projections—and fail to deliver.

Roger Blease, a pioneering insurance analyst who runs Blease Research, in Easton, Pa.,says a better idea is to go back and look at similar whole life policies from different insurersto see how the total premiums paid have translated into today’s accumulated cash values.(He assumes the dividends are reinvested.) Here are Blease’s rankings of national companiesover the past 20 years, with the annual rates of return for a policy sold in 1991 to a man whowas 55 years old that year: Northwestern Mutual, 4.44%; New York Life, 3.37%; Thrivent,3.20%; MassMutual, 3.01%; The Guardian, 2.62%.

* KipTip

(#22848) Adapted with permission from the June 2011 issue of Kiplinger’s Personal Finance . © 2011 The Kiplinger Washington Editors Inc.For more information about reprints from Kiplinger’s Personal Finance, contact PARS International Corp. at 212-221-9595.

*New York Life Insurance Company is providing this reprint with the permission ofKiplinger’s Personal Finance . The material is for general informational purposes only and individualsshould evaluate their own personal situation and needs before making decisions regarding their financial protection. All guarantees associated with whole life are based on the claims pay-ing ability of the issuing company and loans from the cash value will reduce the death benefit and cash value. Dividends are not guaranteed. New York Life Insurance Company receivthe following ratings for financial strength: Standard & Poor’s (AAA), A.M. Best (A++), Moody’s (Aaa) and Fitch (AAA). Source: Individual Third Party Ratings Repor ts (as of 1/25/2

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Kip Lingers Life Begins at 50