Overcoming Financial Obstacle(s) Using Participating Whole Life Insurance Cash Values

In today’s unpredictable economic landscape, financial stability requires more than saving money in a traditional bank account. Many families face unexpected challenges that can quickly deplete savings and create financial stress. Let’s explore how participating whole life insurance cash values can provide a powerful tool for overcoming financial obstacles through the real-life story of one family’s experience.

Eric and Taffy’s Story

Eric, 33, and Taffy, 29, were a young couple with four children when they began working with McFie Insurance. Like many responsible parents, they initially purchased term life insurance to protect their family by replacing lost income and paying off their mortgage should either of them pass away unexpectedly.

However, after learning about participating whole life insurance, they realized this financial tool could provide death benefit protection and living benefits through accessible cash values. They understood that over time, their participating whole life policies would build enough death benefit to eventually make their term insurance unnecessary.

Three years after purchasing their participating whole life insurance policies, the family faced an unexpected challenge. During Taffy’s fifth pregnancy, she developed preeclampsia, a serious complication that required her to be placed on bed rest. This meant Taffy had to stop working, potentially creating financial hardship for the family.

Fortunately, in those three years, Eric and Taffy had built cash value in their policies – Eric had been paying $10,000 annually for his policy, while Taffy contributed $5,000 per year to hers. Together, they had accumulated over $40,000 in cash value.

How Their Policies Helped During Financial Hardship

Prior to Taffy’s health crisis, the couple had already experienced one benefit of their policies. They had recently purchased a new van to accommodate their growing family, using the cash value from their policies as financing. Instead of getting an auto loan from a bank, they borrowed against their policy values, paid cash to the dealership, and made monthly payments of $660.49 back to the insurance company at a 5% interest rate on a 60-month schedule.

When Taffy’s pregnancy complications arose and her income stopped, this $660.49 monthly payment became difficult to maintain. Here’s where the flexibility of participating whole life insurance proved invaluable:

1. Loan Payment Flexibility: Eric and Taffy were able to pause the repayments on their policy loans without penalties or negative consequences. This was possible because policy loans are interest-only loans that are fully collateralized by the paid-up insurance in their policies.
2. No Repossession Risk: Unlike traditional vehicle financing, there was no risk of repossession. The insurance company didn’t threaten to take their van because their policy values secured the loan.
3. Annual Interest Structure: The interest on their policy loans came due just once each year on their policy anniversary dates, not monthly like traditional loans.

This flexibility meant Eric and Taffy could temporarily stop making the $660.49 monthly payments until Taffy recovered and returned to work. Had they financed their vehicle through a bank or dealership, they might have faced late fees, credit score damage, or even repossession when they couldn’t make their payments.

Continued Growth During Challenging Times

Remarkably, their policy cash values continued growing even while they weren’t making loan payments. Although the growth would have been faster had they continued their loan repayments, they weren’t penalized with the loss of the guaranteed annual cash value increases their policies promised.

During Taffy’s recovery period:

• Taffy’s guaranteed cash values grew by another $5,400, despite her annual premium remaining just $5,000 – equivalent to an 8% return on her premium for that year.
• Eric’s guaranteed cash values increased by $11,138, while his annual premium was only $10,000 – equivalent to an 11.38% return on his premium.
• Their policies earned dividends that further increased their cash values. Eric’s dividend of $623 added an additional $1,478 to his cash value, bringing his total annual growth to $12,616 – a 26.16% equivalent return on his $10,000 premium.
• Taffy’s dividend of $329 purchased additional paid-up insurance that added $5,745 to her guaranteed cash value of $5,400, resulting in total cash value growth of $11,145 for the year – a remarkable 122.90% equivalent return on her $5,000 annual premium.

Understanding the growth potential, Eric and Taffy prioritized paying their annual policy premiums even when finances were tight during Taffy’s recovery, though they temporarily paused their policy loan repayments.

The Recovery and Long-Term Benefits

Once Taffy was able to return to work after the birth of their fifth child, the couple simply resumed their monthly loan repayments according to their original agreement. This restored their ability to leverage their policy values again in the future, along with all the additional cash value that had accumulated during their financial challenge.

The experience demonstrated several advantages of participating whole life insurance:

1. Financial Safety Net: The cash value served as an accessible emergency fund when they needed it most.
2. Flexible Access to Capital: The policy provided capital without the strict repayment terms of traditional loans.
3. Ongoing Growth: Their money continued working for them even when they needed to use some of its value.
4. Peace of Mind: The family could focus on Taffy’s health and welcoming their new baby without the added stress of financial instability.

Understanding Participating Whole Life Insurance

To understand why participating whole life insurance was so effective for Eric and Taffy, it’s important to recognize how this financial tool differs from more common insurance products and savings vehicles.

What Makes It “Participating”?

The term “participating” means policyholders participate in the profits of the insurance company through dividends. While dividends are not guaranteed, many established mutual insurance companies have paid them consistently for over a century, even through economic downturns.

These dividends can be used in several ways, including purchasing additional paid-up insurance, which increases the death benefit and the cash value of the policy.

How Cash Value Works

The cash value in a participating whole life policy represents your equity in the death benefit – the portion you’ve essentially “paid up.” This is different from the cash value in other types of policies like universal life insurance.

As you pay premiums, you gradually build ownership in the policy’s death benefit. This cash value component has several important characteristics:

• Guaranteed Growth: The cash value grows at a guaranteed rate specified in the policy contract.
• Dividend-Enhanced Growth: Beyond the guaranteed growth, dividends (when paid) can significantly accelerate cash value accumulation.
• Tax-Advantaged Growth: The cash value grows tax-deferred, and when accessed properly through policy loans, can provide tax-free income.
• Accessible Through Policy Loans: You can borrow against this cash value without credit checks or approval processes.

Policy Loan Advantages

The policy loan feature that benefited Eric and Taffy offers several unique advantages:

1. Collateralized by Policy Values: The loan is secured by your own policy values, not your credit score or income.
2. No Qualification Process: Since you’re borrowing against your own asset, there’s no approval process or credit check.
3. Flexible Repayment Terms: You can repay the loan on your own schedule, or even not at all (though this would reduce the death benefit).
4. Continued Policy Growth: In most cases, your policy grows as if the loan had not been taken (though this depends on whether the insurance company is “direct recognition” or “non-direct recognition”).
5. Simple Interest: Unlike compound interest on many traditional loans, policy loans typically charge simple interest.
6. Private Transaction: Policy loans don’t appear on credit reports.

Beyond Emergency Situations

While Eric and Taffy’s story highlights how participating whole life insurance helped during a financial emergency, these policies can be leveraged for various financial needs throughout life:

• Major Purchases: Like Eric and Taffy’s van, policy values can finance vehicles, home renovations, or other major expenses.
• Business Funding: Entrepreneurs can use policy loans to fund business opportunities or manage cash flow.
• Education Costs: Policy values can help pay for college tuition or other educational expenses.
• Investment Opportunities: When market conditions create buying opportunities, accessible policy values provide ready capital.
• Retirement Income: Well-designed policies can provide tax-advantaged income during retirement.

In each case, the policy owner maintains control and flexibility while keeping their money growing even as they use it.

Building an Estate While Maintaining Flexibility

It’s been suggested that approximately 70% of Americans will never build a substantial estate without life insurance. This makes sense considering the median savings account balance for Americans is just $62,410, roughly equivalent to the average annual income. When emergencies or major expenses arise, these savings can quickly disappear, leaving families financially vulnerable.

Eric and Taffy’s experience demonstrates a different approach. Their participating whole life insurance policies provided not only death benefit protection but also financial flexibility during challenging times. Even while leveraging their cash values to purchase their van and navigate Taffy’s temporary income loss, their policies continued to grow in value.

This combination of protection, accessibility, and ongoing growth makes participating whole life insurance a powerful tool for building long-term wealth while maintaining financial resilience against life’s unexpected challenges.

Is Participating Whole Life Insurance Right for You?

For families seeking protection and financial flexibility, a well-designed participating whole life policy can provide:

1. Permanent Death Benefit Protection: Unlike term insurance that expires, participating whole life provides coverage for your entire life.
2. Guaranteed Cash Value Growth: The policy builds value that you can access during your lifetime.
3. Dividend Potential: The opportunity to participate in the insurance company’s profits through dividends.
4. Financial Flexibility: Access to capital through policy loans without strict repayment requirements.
5. Tax Advantages: Tax-deferred growth and potentially tax-free access to cash values.
6. Estate Building: The ability to build wealth that can be passed to the next generation tax-free.

Financial obstacles are an inevitable part of life. For Eric and Taffy, a health complication could have created financial strain at an already stressful time. Their participating whole life insurance policies provided the financial resources they needed to navigate this challenge without additional hardship.

In an unpredictable world, financial tools that provide protection and flexibility are invaluable. Participating whole life insurance, when properly structured and understood, can be an important component of a financial strategy that helps families overcome obstacles and build long-term financial security.

For families like Eric and Taffy’s, participating whole life insurance has proven to be not just an insurance policy, but a versatile financial tool that provides protection, builds wealth, and offers peace of mind through life’s unexpected challenges.

Tomas P. McFie DC PhD

Tom McFie is the founder of McFie Insurance and co-host of the WealthTalks podcast which helps people keep more of the money they make, so they can have financial peace of mind. He has reviewed 1000s of whole life insurance policies and has practiced the Infinite Banking Concept for nearly 20 years, making him one of the foremost experts on achieving financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.