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When Scott and Suzy welcomed their daughter Amber into the world in 1990, they made a decision that would profoundly impact their family’s financial future. They committed to setting aside $200 monthly for Amber’s future needs. Rather than opening a traditional savings account or investment fund with uncertain returns, they chose a participating whole life insurance policy designed to build high cash value over time.
Scott and Suzy recognized that life’s major milestones often require financial resources. Whether Amber would attend college, get married, or pursue other endeavors, they wanted to create financial flexibility for their family’s future. By choosing a participating whole life insurance policy, they secured death benefit protection and a powerful financial tool that would grow over time.
Starting when Amber was just a baby, Scott and Suzy contributed $200 monthly to her policy. This consistency demonstrated their commitment to her financial future. For the first 16 years, they maintained this exact contribution amount. Then, to prevent the policy from becoming a Modified Endowment Contract (MEC) and losing its favorable tax treatment, the insurance company slightly reduced the allowable premium by approximately $12 monthly. From ages 16 to 22, Scott and Suzy contributed $2,257 annually instead of the original $2,400.
By making this adjustment, Scott and Suzy ensured that the policy maintained its tax advantages while continuing to build cash value. This demonstrates one of the main aspects of participating whole life insurance: the policies are designed to provide maximum financial benefit while working within IRS guidelines to preserve tax advantages.
When Amber accepted Jason’s marriage proposal, Scott and Suzy had a meaningful gift to offer. The participating whole life insurance policy they had diligently funded had accumulated over $72,000 in cash value. This was accessible capital that could be deployed for big expenses while continuing to work for their benefit.
Scott and Suzy decided to leverage this financial tool to give their daughter the wedding of her dreams. They borrowed $40,000 from the policy to fund Amber and Jason’s wedding celebration, knowing they could repay this loan on terms that worked for their financial situation. They committed to repaying the policy loan over the next decade until the cash value returned to its previous level.
What makes this approach so powerful? Consider the mathematics of their decision:
This represents an extraordinary growth trajectory. The cash value increased by $40,636 (from $34,829 after taking the $40,000 policy loan, to $75,465) – a compound annual growth rate of 9.857% on their $200 monthly repayments over that decade.
To understand why this approach was so effective, it’s important to recognize how policy loans function in participating whole life insurance. Unlike a traditional loan where the borrowed money no longer generates returns for you, a policy loan allows the insurance company’s general fund to lend you money while your policy’s cash value continues growing.
When Scott and Suzy borrowed against the policy, the $40,000 they received came not from the policy itself but from the insurance company’s general account. The policy’s cash value served as collateral for this loan. The policy’s cash value earned dividends and guaranteed growth even while the loan was outstanding.
The insurance company charged interest on the loan – usually around 5-8% depending on the company and when the policy was issued. Since the underlying cash value continued growing, the net cost of borrowing was reduced. This creates a leverage effect that’s not available with most other financial instruments.
After Scott and Suzy restored the cash values of Amber’s policy to $75,465, they made another decision – transferring policy ownership to Amber. This transition not only gave her an asset with substantial cash value; it also passed along a powerful financial tool and the wisdom to use it effectively.
Recognizing the value of what they received, Amber and Jason decided to continue funding the policy with $200 monthly until Amber reaches her full retirement age of 70. This long-term perspective reflects a key benefit of participating whole life insurance – its ability to serve different financial needs throughout various life stages.
The projections for this continuing investment are remarkable:
By age 70, the policy’s cash value is projected to reach $609,538, representing an 8.114% return on the $200 monthly that Amber and Jason will have contributed over 38 years. This cash value can then be converted to a guaranteed lifetime annuity providing Amber with $47,507 annually for the rest of her life.
If Amber lives to age 90, she will have received $950,140 from this annuity – created from just $91,200 in total contributions from her and Jason. This represents a 9.71% return on their monthly investments – a remarkable outcome for such a stable financial instrument.
If Amber doesn’t need annuity income and allows the policy to compound without additional premiums past age 70, she will have a death benefit of approximately $1,351,000 to pass tax-free to her beneficiaries. This would be equivalent to earning 10.934% on Amber and Jason’s portion of the contributions.
What Scott and Suzy achieved for their daughter goes beyond helping with wedding expenses. They established a multi-generational financial legacy by:
The total financial impact is substantial. Scott and Suzy’s costs totaled $69,028 ($45,027 in premiums plus $24,000 in policy loan repayments). In exchange, they were able to gift Amber $75,465 of cash value plus $40,000 for her wedding – a total gift of $115,465, representing 67.273% more than what they managed to save.
Even more remarkably, this gift continues growing. Amber’s contributions will earn approximately 8.114% tax-free returns, and the policy could potentially leave a tax-free legacy of over $1.3 million to future generations.
It’s important to recognize that Scott and Suzy weren’t limited to using this policy for wedding expenses. They could have kept ownership and leveraged the $75,465 cash value for various purposes:
The flexibility of participating whole life insurance makes it a versatile financial tool. Unlike retirement accounts with strict withdrawal rules or investments with market volatility, policy cash values remain accessible through policy loans at any time and for any purpose.
To understand why participating whole life insurance can deliver these financial outcomes, we need to recognize several attributes that distinguish it from other financial products:
Participating whole life insurance provides guaranteed cash value growth. The insurance company is legally bound to deliver the cash values shown in your policy illustration. When the insurance company performs well, policyholders receive dividends that can enhance returns beyond the guarantees.
The growth of cash value within a participating whole life policy is tax-deferred. When accessed properly through policy loans, this growth can effectively become tax-free. The death benefit passes to beneficiaries income tax-free, creating efficient wealth transfer possibilities.
Unlike many retirement accounts or investments, policy cash values remain accessible throughout your lifetime without penalties, regardless of age or circumstance. This provides financial flexibility that few other instruments can match.
Participating whole life insurance is not directly exposed to market fluctuations. The insurance company’s general account, which backs these policies, is mainly invested in high-quality bonds and other stable investments, providing consistency even during market downturns.
Participating whole life allows your money to continue working for you even while you’re using it for other purposes. When you take a policy loan, your cash value continues growing as if the loan hadn’t been taken.
The power of leveraging participating whole life insurance becomes clear when examining the mathematical advantages. Consider what happened with Scott and Suzy’s approach:
They borrowed $40,000 from the policy to fund Amber’s wedding. Had they withdrawn this money from a traditional savings account or investment, that capital would have stopped working for them. Instead, the policy’s cash value continued growing during the loan period.
By repaying $200 monthly for 10 years (totaling $24,000), they restored the policy’s cash value to $75,465. The difference between their repayment amount ($24,000) and the final cash value ($75,465) represents the power of uninterrupted compound growth within the policy.
This differential growth occurs because:
This approach to financing major expenses exemplifies what financial educator R. Nelson Nash described as “becoming your own banker.” Rather than paying interest to traditional lending institutions, policy owners can recapture much of the “cost” of borrowing by structuring repayments that enhance their policy’s performance.
When you repay a policy loan, you’re not just restoring your ability to borrow again – you’re building equity within your policy. Unlike a traditional bank loan where interest payments benefit the bank’s shareholders, interest payments on policy loans indirectly benefit participating policyholders through the insurance company’s overall profitability.
Scott and Suzy’s approach demonstrates the value of long-term planning for life’s major milestones. While they used their policy for wedding expenses, the same approach could be applied to various financial needs:
By establishing a participating whole life policy early and funding it consistently, families create financial flexibility for future needs that might otherwise create debt or deplete retirement savings.
For parents or grandparents considering a similar approach, several factors can maximize the effectiveness of a participating whole life strategy:
The power of compound growth makes early policy establishment valuable. Starting a policy when children are young maximizes the time for cash value accumulation and keeps premium costs lower.
Not all whole life insurance is created equal. Seek established mutual insurance companies with strong dividend histories. Mutual companies are owned by policyholders rather than shareholders, aligning the company’s interests with policy performance.
Policy design impacts performance. Work with an agent who specializes in designing policies for cash value accumulation rather than maximizing death benefit or commission. This involves using paid-up additions riders to enhance early cash value growth.
The compounding effect depends on consistent premium payments. Establish a systematic approach to policy funding, treating premiums as a non-negotiable financial priority.
Before implementing a policy loan strategy, understand how loans impact your specific policy, including interest rates, repayment flexibility, and effects on dividends (direct vs. non-direct recognition companies handle loans differently).
When leveraging policy cash values, establish a structured repayment plan that enhances overall policy performance rather than simply meeting minimum requirements.
Scott and Suzy’s approach is a departure from conventional financial planning, which often emphasizes:
By integrating participating whole life insurance as a central financial tool, they created a versatile approach that:
When Scott and Suzy began setting aside $200 monthly for their newborn daughter in 1990, they likely couldn’t fully envision how their decision would impact multiple generations. What began as a prudent financial planning move evolved into:
By funding $45,027 in premiums and $24,000 in policy loan repayments (totaling $69,028), Scott and Suzy created a gift worth $115,465 – with the potential to grow into millions over time.
The wedding day was memorable, but the financial wisdom they passed to their daughter may be their most enduring legacy. Through participating whole life insurance, they demonstrated how thoughtful financial planning can strengthen family bonds and create opportunities across generations.
While not every family situation will mirror Scott and Suzy’s experience, the principles apply broadly. Whether planning for weddings, education, business ventures, or other financial needs, participating whole life insurance offers a combination of guarantees, growth potential, tax advantages, and flexibility that few other financial tools can match.
For families looking beyond conventional financial approaches, participating whole life insurance deserves consideration as a cornerstone strategy for building and transferring wealth across generations.
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.
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