A Real Whole Life Policy’s Returns

by Wes Bridel on September 15, 2009

in Stewardship

Rather than risking your luck on the stock market, why not trust the safety of a whole life policy?

Rather than risking your luck on the stock market, why not trust the safety of a whole life policy?

“If you are willing and obedient, you will eat the best from the land” (Isaiah 1:19)

We became frustrated that the companies were showing such an artificially low projection (as we discussed in the last Whole Life Insurance post) while knowing that they had historically performed much better. So we went to one of the strong mutual insurance companies to get an inforce ledger from a real policy to see how it had done in real life.  We found that during one of the greatest bull markets in stock market history, this boring old whole life policy had outperformed if you knew how to take advantage of the policies benefits.  Let’s take a look:

We apologize in advance if this information is a little short on too many details, but it is a real person’s policy info, so in this forum, we really only want to show the highlights.  Sally isn’t her real name, but that’s what we’ll call her.

If we assume that Sally didn’t really understand any of the economic benefits of the whole life policy that we’ve been discussing, and simply paid her premiums for the 27 years the policy was in effect, and then at the end of that time, walked away with the cash, she will have achieved a 6.93% IRR.  As we stated above, if she were in a 25% tax bracket, she would have to achieve a 9.24% IRR in a separate account to compete with that or 10.66% if she were at the 35% bracket.  This is without understanding any of the benefits or components that we have talked about, Sally is getting the type of returns that sane people hope for in the stock market.

What if we break the results down further?  If we separate the first 3 years of the policy and assume that those paid for the long term death benefit (which is going to give her permission to use the rest of her assets in her old age without worrying about running out), and look at that benefit 27 years later (the age of the policy when we got the current numbers), she would have achieved a 15.12% IRR over these 27 years.  That’s equivalent to over 20% IRR after tax!  Our clients achieve these types of results on investments here and there, or for a year, or a few, but to do this for 27 straight years without risk is astonishing.

Now that we’ve eliminated the first 3 years, if we focus on the next 24 years of the plan producing the cash values, we see that Sally had a 8.59% IRR.  Equivalent to 11.45% at the 25% tax bracket and 13.21% at the 35% bracket.

These numbers do not include the external rate of return (ROR) benefits of all the other benefits that we’ve already discussed.  So even though Sally was not taking on any market risk and experienced zero market fluctuations with her safe Whole Life policy, she outperformed those taking substantial risk in the stock market during a period which included the greatest bull market in stock market history!

We don’t share these numbers to say that your policy going forward will achieve what Sally’s did.  Yours will be different than hers and different from what the conservative illustration the company produces says.  But it’s nice to see a range of possible outcomes.  The company provides very conservative possibilities.  You can’t get any lower than the guaranteed minimum they show, but if interest rates go lower than they are now and stay there then dividend rates will be lower than the current scenario they depict.

We’ve also looked at a very real outcome that happened for someone who owned this policy over the last few decades (again, this is not a story of someone who got really lucky, but of everyone who owned a policy like Sally’s over this time period with this company).  If we see massive inflation and higher interest rates than Sally saw, your policy might do better, or most probably yours would earn somewhere in between these extreme scenarios, although extreme inflation should be a potential possibility on your radar.

This is Part 7 in a series on Whole Life Insurance.  You might want to read the introduction to this series which will link to each post in the explanation of whole life and Ben’s story showing how whole life is used in a variety of ways in his life.

Photo credit: Dusty M.

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