Whole Life Insurance

Isn't it a reaffirming name? "I want my life to be whole, thank you very much."

This is your grand-daddy's insurance policy, without bells, whistles, apps, or rss feeds. It's where the insurance company says, "You there. Yes you. I like the cut of your jib. If you give me $50 a month, I'll pay whomever you want (as long as you're not planning to immediately or eventually kill them) $1,000,000! Deal or no deal?"

And, yeah, while that nice huckster-man in the last example is giving a super simplified version, that's basically what whole life insurance is...as long as the monthly, biannually, or annual premium is paid. Otherwise, the policy "lapses." All these policies typically have a given lowest-rate-of-return, and unlike variable insurance policies, the rate is stable. Either way, the amount the customer pays is always the same.

It's more solid than "universal life" and is way more solid than "universal variable life." If health insurance is a safety net for your health, then guess what life insurance is:

Yep, a safety net for your life, i.e. in case you die. Which, unless you’ve found the Fountain of Youth or a genie in a lamp, is gonna happen. With life insurance, there’s the “owner” of the policy, who is usually also the “insured”--you know, the person whose death makes it rain money. The person who would get that money is the “beneficiary.”

And, of course, there’s the “insurer” -- the life insurance company that takes your money every month. They’re also the ones that cough up a wad of cash when you bite the dust.

Whole life insurance--whole with a “w”--is a type of permanent life insurance. It’s “permanent” because it follows you for life...like an insurance grim reaper, always lurking in the shadows. Whole life insurance was born from its mother, term life insurance. Back in the day, when life insurance was just getting its start, in life, term life insurance was the only option.

Like, you’d pay $57 bucks for a month’s worth of a million dollar life insurance. If you didn’t die that month (congratulations!), then the insurance company kept all the money you just gave them. And...then it would start all over again the following month.

For the insured, life insurance can kind of feel like a lose-lose situation, if you live, you’re making payments that go into an abyss, and if you die, well, you’re dead, but at least your kid or mom or whoever the beneficiary is has some money. Uplifting stuff.

Life insurance buyers got tired of this term life insurance gamble every month, losing all the money they gave to the insurance companies. So they began to...think, and using the power of frighteningly large groups, they began to invest the money in markets with a 30-year time horizon. No more giving over that $57 bucks every month to the insurance company, watching all the money go down the drain.

As you might imagine, the life insurance companies weren’t very fond of people getting smart on them, investing their money for insurance instead of dropping it into their black hole, so they decided to cut a deal. They said, “we’ll cover you for three months instead of one, and if you fall off a bridge or get hit by a bus, your wife and kids will be seeing a cool million dollars.

And, we’ll invest half of your monthly premium in a index fund—yes, we’ll even let you choose which one—and the other half we get to keep. And if you want to back out and terminate the plan, not because you’re in a wooden box. But because you ran out of money or are moving or something, you can keep 80% of what’s in that pot.”

This structure further evolved into what we have today: whole life insurance, which covers you not for one month or three, but for life. Remember, it’s permanent. You could still cancel, but it would cost you a pretty penny.

Whole life insurance includes building up savings from part of your premium payments--not watching all your premiums go into the black hole. Since whole life insurance is permanent, it acts as a no-touchy investment account. And, because it has high fixed payouts when you die, it’s super expensive.

In essence, a whole life insurance plan is tricycle-style, a hand-holdy investment vehicle that tries to pull a Miley Cyrus, getting the best of both worlds. For those with the cash and discipline and the ability to stay alive--watch out for that bus--you can make your own whole life insurance policy by buying shares of an index fund for yourself.

With no insurance company middleman taking a cut, you own 100% of the investment. All that’s left to do then is, um...not die, for a decade or three.