When most people think about building wealth, they think of investing in stocks, mutual funds, and real estate. But there’s another often-overlooked option: dividend paying whole life insurance.
Let’s discuss how to use this type of insurance for wealth planning.
Want an even deeper understanding of the benefits of dividend paying whole life insurance? Get your free audiobook or hardcover copy of the bestseller What Would the Rockefellers Do? It details the financial system used by the ultra-wealthy to protect, grow, and pass on wealth.
What Is Dividend Paying Whole Life Insurance?
First, let’s make sure we’re on the same page regarding what dividend paying whole life insurance is.
Dividend paying life insurance is permanent life insurance that provides lifelong coverage, a death benefit, and a dividends component. Dividends are funds paid to you by the insurance company based on their financial performance over a specific time.
There’s also a cash value aspect to dividend paying whole life insurance. As you pay your premiums, a portion of that money goes into a policy’s cash value, which grows over time. The longer you keep the policy in force, the more opportunity there is for growth.
Once the cash value of the insurance reaches a certain level, you can borrow against it or withdraw funds.
Why Is It a Good Investment?
There are several reasons why dividend paying whole life insurance is a good investment for building wealth. These are the reasons why the wealthy don’t “buy term and invest the difference.”
Some of the benefits of whole life insurance include:
Consistent Returns
One of the main benefits of dividend paying whole life insurance is its ability to provide consistent returns. Other investments may have fluctuating returns depending on market conditions. Dividend insurance guarantees a minimum rate of return. This makes it an attractive option for those looking for a stable and reliable investment.
Tax Advantages
This type of life insurance also offers tax advantages. The cash value growth is tax-deferred. This means you don’t have to pay taxes on the gains until you withdraw them. Additionally, death benefits are typically not taxed as income for beneficiaries.
Diversification
Investing in dividend paying whole life insurance allows you to diversify your overall investment portfolio. This can help mitigate risks and provide stability during market fluctuations.
In What Would the Rockefellers Do?, which I co-authored with Garret Gunderson, we wrote:
“When you know that your savings are stored securely and where they will earn a guaranteed rate of interest, you can make financial decisions, run your business, and plan your life differently than you would when just hoping.”
To put it another way, dividend paying whole life insurance is an excellent way to build wealth in a secure way.
How To Build Wealth with Dividend Paying Whole Life Insurance
Those are the basics of dividend paying whole life insurance and its benefits. Now let’s discuss some strategies for building wealth with this type of investment.
Use Dividends for Cash Accumulation
One effective strategy for building wealth with this type of insurance is to reinvest the dividends back into the policy. Reinvesting dividends means using the dividends earned to purchase additional paid-up insurance. This “overfunded whole life insurance” increases both the death benefit and the cash value of the policy.
This approach leverages the compounding effect. The reinvested dividends themselves start generating dividends, exponentially growing the cash value over time.
By consistently reinvesting dividends, policyholders can significantly enhance their policy’s value.
Utilize Policy Loans
Another way to build wealth with dividend paying whole life insurance is by utilizing policy loans. These are low-interest loans that allow policyholders to borrow against the cash value of their policy.
The interest rate on these loans is often lower than traditional bank loans. This makes them an attractive option for financing large purchases or investments.
Plus, the borrowed funds do not need to be paid back in full. The outstanding loan amount will simply be deducted from the death benefit upon the insured’s passing.
Using policy loans strategically gives you access to funds for other investment opportunities. It does this while still maintaining the growth of your life insurance policy’s cash value.
Take Advantage of Uninterrupted Compounding
Uninterrupted compounding refers to the continuous accumulation of interest on the policy’s cash value without any interruptions or resets. This means that the interest earned on the cash value of the policy compounds over time. This enhances the growth of the cash value.
With uninterrupted compounding, the interest is calculated on the initial principal. This includes all the accumulated interest from previous periods. This feature allows policyholders to benefit from exponential growth in their cash value. Each interest payment builds upon the previous ones. This leads to a substantial increase in the policy’s value over the long term.
Uninterrupted compounding is enabled by policy loans.
To quote again from What Would the Rockefellers Do?:
“Because you’re borrowing against your policy and not from it, the actual cash in your policy remains untouched. No money is removed from your account. Therefore, the money in your account can continue to compound and grow completely uninterrupted. Your cash value grows even when you have borrowed against it. Even when you are paying the loan back, your cash value is uninterrupted and compounding.”
Leverage the Tax Benefits of Dividend Paying Whole Life Insurance
One significant advantage of dividend paying whole life insurance is its tax benefits. The cash value and death benefit are usually not subject to income taxes, making this a tax-efficient investment option.
Additionally, when dividends are reinvested, they’re not taxable as long as they remain within the policy. This provides an additional opportunity for wealth building without being taxed on any earnings.
Reduce Premium Cost
One way to manage the cost of your life insurance policy is to apply dividends to reduce premium payments. In other words, the dividends generated from your policy are used to offset future premium costs. This can be particularly helpful for policyholders who prefer to minimize out-of-pocket expenses.
Over time, as the dividends grow, they can cover a significant portion, or even all, of your premium payments. This approach helps in cost management and allows you to maintain the policy without the constant need for additional funds.
Final Thoughts
Dividend paying whole life insurance can provide stable growth and tax benefits.
If you’re looking to diversify your investments with a low-risk option, add dividend paying whole life insurance to your financial strategy. It may just prove to be an essential piece of your wealth-building puzzle.
Want to learn more about the benefits of whole life insurance for building wealth? Get your free audiobook or hardcover copy of What Would the Rockefellers Do?