Sunday, September 15, 2013

Whole Life Insurance As An Alternative to Health Insurance?

Now that the health insurance market is even more screwed up thanks to Obamacare and is only worth staying out of, people need to look at potential alternatives for something to fill that need (if they want to). One possibility: whole life insurance.

I know, Dave Ramsey hates the stuff. Please don't bother reminding me, but also don't let his rejection of it stop you from reading further. His panning of the product is based purely on a dollars and cents perspective, which has its merits, but only to the extent that an individual values only that. There are other uses for this stuff than just insurance, and some may find those other possibilities to be worth every penny. Here's a little taste: what if you didn't have to deal with bankers as much, or ever again? Interested? Read on.

Whole life insurance is life insurance, not health insurance, so it's not an obvious nor direct replacement. It's also not cheap insurance, relative to "term" life insurance. However, unlike term and unlike health insurance, it has cash value (I'm ignoring HSA accounts in stating this; you have to have an eligible health insurance policy to  be allowed to fund an HSA account, but the account is separate from your policy).

The cash value of a whole life policy is an internal dollar amount that the policy is worth. It is not the death benefit, which is what the policy will pay out to beneficiaries upon the death of the insured. Over time, if a policy is structured in a certain way, the cash value can increase the death benefit, but for now just focus on the fact that they're different things.

The sum that sits inside a whole life policy is a portion of the premiums paid to keep the policy in force. They accumulate over time and earn interest (sometimes called dividends). Subject to certain limits, a person can "over fund" their policy by paying extra money into it, which adds to this cash value faster.

This is where things get interesting. The interest/dividends earned within the policy are not subject to income taxes, and whole life insurance policies will typically pay a minimum guaranteed rate, otherwise paying more if market conditions allow it. For example, my policy will always return at least 3% per year, but currently it's returning 4.5%. Your earnings grow tax-free (so you have to take into account the tax-equivalent yield to correctly evaluate what you're getting), and they can only grow - you can't lose ground (worth) like you can in the stock markets.

So what? Life insurance only pays out when you die, right?

Not quite. You can take loans against the cash value of a whole life policy. Loans are also not subject to income taxes. You're still in the clear in that regard.

So usually when you take out a loan, two things happen: you become obligated to pay the loan back, and the lender begins charging you interest. When you borrow from a whole life policy, you're not technically obligated to pay the loan back, and YOU are the recipient of interest on the loan.

It's simple: if you borrow from your policy and don't pay the loan back, then your policy lapses and that's the end of that. The money you owe, you owe to yourself. Obviously you can't be in debt to yourself, so what this really means is that not paying back a loan you took out from your own life insurance policy just collapses and cancels the policy. You don't end up owing the provider.

But there's a very good reason to pay the loan back, and that's the interest that's building on the cash value portion of the policy.

If you take a sum out of a savings account, say $1,000 out of a $10,000 balance, you cease earning interest on the $1k you have in-hand. The other $9k is the only portion earning interest, so your total earnings go down. If you did the same thing with a whole life policy, you continue earning interest on $10,000, as if you never took the $1k out. When you pay the $1k back in, you have your $10k in place, plus ALL of the interest you would have earned. 

Think about that. You borrowed from yourself, continued to earn interest on your savings as if you had not touched them, but you had the full utility of the funds you did borrow anyway. When you paid the money back, you put it back into your own pocket, not into someone else's pocket. As long as you restore the cash you borrowed to the policy and keep it in force, you get to keep everything.

You also don't have to qualify for a loan from your own policy. You just tell your provider that you want a loan, and you get your check. You can't borrow more than your policy contains in cash value, so there's no need for the insurance company to subject you to the Spanish Inquisition-like experience that you get if you walk into a typical bank seeking a loan. You are the bank. 

There's no age restrictions here either, unlike IRAs, 401(k) accounts, etc. There's also no purpose-specific qualifiers for taking out a loan on your policy, unlike funds in a Health Savings Account, which must be spent on whatever .gov decides to declare "allowable expenses." 

That's where this product really begins to head off into "life serving" territory; that is, it serves your life and enhances it, versus what health insurance has become, which by and large appears to be increasingly promising to do the opposite. 

The money you pay toward a health insurance plan goes only toward that. The money is gone. You have access to certain services described by the plan, but unless you put a whole lot of money toward the policy each month, you're still going to have to come up with more to cover your co-pays. You can't get a loan from your health insurance policy to do something else in life that interests you. If you want to get a new car, put a down payment on a house, buy up some dividend paying stock in the midst of a market crash, whatever you can think of, there's nothing in your health insurance to do that with. The utility of the money you paid toward your health insurance is gone forever, locked up in that particular use by the dictates of asshole government bureaucrats who will make your health insurance unnecessarily expensive by loading it up with coverages you don't need, forcing you to go forth and earn it somewhere all over again (and the next month, they'll be back for more...).

Unlike contemporary health insurance, which is now plagued with the horrendous concept known as community rating, where you are at the mercy of the dumbest and sickest people around you when it comes to how your health insurance premiums are set, a life insurance company will look at you as an individual. You can actually get a LOWER premium for making good choices: eating right, exercising, not drinking a bottle of whiskey and smoking three packs of cigarettes a day, etc. Once your premium is determined, it remains level for the rest of your life, too, unlike health insurance premiums that will rise every year, whether you use the policy or not. So, contrary to what health insurance markets have been twisted into by special interests and moron politicians, the life insurance market rewards the young and the healthy.

The potential use for this kind of insurance that I'm getting at should be obvious by now: instead of paying good money into something that is over-priced, set up to punish your good behavior because of the bad behavior of others, and which offers you no value outside of its sole purpose, why not buy yourself something that serves you in whatever way you see fit?

If you get sick, borrow against your policy. If you get really sick - terminally ill - you may even be able to access up to half of the death benefit of your policy, which you can use to handle your medical and life expenses (you choose how to spend the money). Granted, your medical bills could end up being larger than the value of your policy. It's a risk that you would be taking on, certainly. On the other hand, what if that doesn't happen? What if instead you stayed away from this kind of product and went for exorbitantly expensive health insurance, paid thousands of dollars per year into it, and then find after several decades that you never needed it that entire time. All of that money, and all of the time out of your finite life that you traded for it - poof! Gone! Health insurance cannot be used to build wealth like whole life insurance can. Want something else now? Well, get back to work! You have to earn that money all over again. 

Like I said, I have one of these policies, and now that I've kicked the bullshit health insurance market to the curb, I'm looking to start another. I won't disclose who my provider is, only because I'm not looking to endorse any particular insurance company. Some are better than others, but I leave that up to you and your agent to research and decide on.

Life is risk. It's also finite. There's never going to be a "completely safe" way to go through life, and there's only so much time that each of us has to get on with the things that we want to do. There are pro's and con's to everything, trade-offs between alternatives that must be evaluated. What those are is a question of what an individual finds relevant to him or her, which is a matter of what they value. The problem with what has happened in the health insurance market is that some people are trying to force everyone else to participate in what it is that they value. They do this at great cost to some for the benefit of others, and in such a way that many people, especially the young, will have to put their dreams on hold for years and years as they're forced to work to fund someone else's interests. Whole life insurance has its drawbacks, but depending on your interests, hopes, and dreams, it may serve you better than health insurance ever will. That's for you to decide.

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