How To Get Out of the Whole Life Insurance Trap

By Scott R. Tucker

November 25, 2019

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In the 1980s, some financial firms catering to the military and veteran community recognized that Permanent Whole Life insurance could be a way to privatize the protection of a military pension. Unlike term life insurance, which has no cash value and only pays a benefit if the insured dies, permanent whole life insurance—with its cash value, ability to grow the principal, and tax protection—offered a permanent solution to estate planning. In fact, whole life insurance has long been a way for wealthy individuals to protect and grow their assets. 

During the stock market boom of the 1990s, these firms took advantage of the investing mania that had gripped the country and started getting more clients to come in and set up retirement plans. Whole life insurance was an easy upsell to these clients as a way for them to both provide a death benefit for their families and leave a permanent legacy. At some point in retirement, the policy would be paid in full, and the insured wouldn't actually have to pay for the insurance anymore. They would also be able to purchase what are called “paid-up additions” every few years that would allow them to add more value to the policy without having to requalify for coverage. The reasoning was that taking this approach during a military career would leave you with the perfect amount of insurance to cover your pension, so there would be no need to take the government standard Survivor Benefit Plan (SBP). 

What’s wrong with whole life insurance?

Whole life insurance does offer both equity and permanent coverage, and when properly funded, properly used, and properly understood, the whole life insurance strategy can work. However, this approach has some major flaws and is very confusing—even for the agents who are selling it. They don't understand and don’t properly explain the distinct value proposition of these policies, nor do they understand the unique situation of military/veterans. They just do what they’re told to do by their firms and sell it. Consequently, a lot of veterans who purchase whole life insurance don’t really understand what they are purchasing. They believe it is just another form of life insurance, but comparing a term policy to any type of permanent policy, especially a whole life insurance policy, is comparing apples to oranges. It sometimes happens that the veteran learns later that they could arrange a death benefit much more cheaply with a term policy, and since they are paying a lot for the whole life policy without fully understanding what they are paying for, they abandon their whole life policy for the term in order to pay less in premiums, losing whatever equity they had in the policy in the process.  

There is a lot of misunderstanding and misinformation around whole life insurance. But the biggest problem with whole life insurance today is that it hasn't changed in many, many years. Agents today are selling the same whole life insurance products they were selling in the eighties. Most of the policies that were sold to veterans don't reward you for good health beyond simply being a non-smoker, which makes them no different, at the end of the day, than Servicemembers’ Group Life Insurance (SGLI) and Veterans Group Life Insurance (VGLI). 

 Another feature of these whole life insurance policies is that you pay most of the cost up front, similar to the way that interest is front-loaded in your mortgage, so that you are paying off your interest before you ever really start making a significant dent in your principal, which is how you build equity in a house. It’s true that the equity in a whole life insurance policy can be accessed tax-free later in life; but this is usually by way of a loan provision stipulating that you have to pay the company that’s administering your policy in order to access your money, just like you would get a loan from a bank.

 Finally, a traditional whole life insurance policy doesn’t offer a great deal in terms of equity. The return on investment (ROI) is severely limited by market interest rates. These policies only see growth comparable to a bank Certificate of Deposit (CD), which is not a smart way to leverage compound interest over 30+ years. 

 If you are a veteran who has already purchased a whole life insurance policy, we have good news for you. You can leverage something called a 1035 exchange to move the cash value from your policy into a more modern, permanent policy with definite advantages over whole life, all tax free and with no penalty. 

Our Alternative to Traditional Whole Life Insurance

At US VetWeath, we’ve been working on how to privatize the protection of a military pension to help retirees avoid the potential sunken costs and low ROI of the SBP/VGLI status quo for over ten years. Our team members do not have quotas to fill, and we offer these financial vehicles to our clients at substantially less cost than they would pay in “invest the rest” investment fees or for other whole life policies. 

Our alternative to the SBP and VGLI problem gives you both a lot more equity growth (as interest is credited based on the S&P 500 performance, not the federal bond rate) and a lot more liquidity that you can access while you're still alive. It offers a safeguard against negative market returns and allows you to both comfortably fund your retirement and still be able to leave a legacy behind you when you die. We call it your Survivor Liberty Plan.

This completely new approach to privatizing the SBP or pension protection has become available in recent years; however, the majority of financial experts and professionals are still very unaware of this solution and the game-changing benefits it brings to solving the military pension problem. Modern life insurance can provide the death benefit protection of a term policy while also producing an annuity stream much like the SBP; to be more accurate, it can provide an annuity stream much like the pension, because you can use it while the veteran is still alive! It also costs less than the fees involved in typical 401k, mutual funds, or other retirement plans that come along with money managers all taking a cut of the investment, regardless of the plan’s performance.

Further, after 30 years, the costs of the Survivor Liberty Plan are significantly lower than an SBP, and the ROI is significantly higher than on a term insurance or whole life policy. In the best case scenario, whole life plans usually grow between two and four percent compounded annually, and the death benefits are typically significantly higher than they need to be because they are sold as an alternative to term instead of as a compliment, to the benefit of the agent (not the client), who gets paid much more for selling whole life. As a result, the cost to insure is also very high, and it takes about 10 to 15 years of regular contributions for an insured person to fully cover the cost of their insurance before they break even and there is any equity that can be accessed. Moving these funds into a Survivor Liberty Plan using the 1035 provision allows those returns to take effect much earlier. This basically amounts to taking money that you've already put to work for you and giving it a raise. 

Getting Out of the Whole Life Insurance Trap

A 1035 exchange is a provision in the tax code which allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy without having to pay taxes. When working with clients who already have an old-fashioned whole life insurance policy, we take a three-pronged approach. 

First, we set up the bulk of the death benefit as a convertible term insurance policy with the opportunity to convert growing amounts of that money into investment-grade permanent placement insurance as more funds became available. Setting up the bulk of the death benefit in a term policy allows you to have a larger death benefit while keeping your costs low. 

We then do a 1035 exchange to move equity from your old-fashioned whole life policy into the modern insurance policy with a relatively low death benefit, which we can comfortably do because the bulk of the death benefit is being covered by the convertible term plan. We do this because the smaller the death benefit initially, the lower the cost to fund the plan. In this way, we can take the type of product that would normally take 10 to 15 years just to break even and bring that timeline down to three to five years, if not immediately. 

Finally, you start contributing funds to the new modern insurance policy at a rate that is comfortable for you. Unlike the older whole life insurance policies that offer growth rates comparable to CDs, with the new policy you are able to both capture and lock in the growth offered by the securities market without the value of your policy being negatively affected by market corrections. The worst case scenario market rate of return in any circumstances is zero, meaning you get to keep all of your market gains, but you don’t experience market losses; during any downturns you simply experience zero growth on your intact principal. It takes a lot less time for the cash value of the modern whole life policy to grow at a pace that outstrips inflation and quickly starts keeping pace with things like the S&P 500. The money you are using to fund the plan not only keeps pace with inflation, it grows in value over time because it is invested. 

Furthermore, as the modern insurance policy matures, the death benefit increases, since there are IRS rules that require a certain amount of death benefit depending on how much the plan is funded. If you put too much in, it becomes a modified endowment contract and becomes a taxable event. To prevent this, we pace your contributions such that you will be able to maintain a certain amount of death benefit on top of what the cash value of the policy is or grows to be.

Find out if you qualify for the Survivor Liberty Plan

Converting your old whole life insurance policy into private placement investment grade life insurance will require you to fill out an application and go through the underwriting process to ensure that you qualify. Going through the qualification process DOES NOT commit you to buy the policy. Finding out that you are qualified DOES NOT commit you to buy the policy either. The sooner you apply—today, while you are young and/or in good health—the better. Once you know for certain that you qualify and that the Survivor Liberty Plan is something you want to consider, then you can take as much time as you need to reflect and discuss your options with us and your family before making a commitment. Reach out to US VetWealth to see if you qualify today. Or, if you still want to learn more before contacting us, read our blog post on How to Avoid the Pitfalls of SBP and VGLI at Military Retirement.

Scott R. Tucker

About the author

Scott R. Tucker is an author, speaker and the founder of US VetLife/US VetWealth, a lifestyle and financial consulting brand that helps service members go from paychecks and government benefits to wealth and liberty. He likes to say, "I Help The 1% Who Serve Our Country Become The 1% Who Influence It." A West Point graduate, serial world traveler, military financial expert, and entrepreneur, Scott brings valuable experience and insight to those who have sacrificed so much in service to our country. He's the Rosie Network's #1 Fan and a passionate supporter of the Veterans Cannabis Project.

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