A Financial Bunker For Scary Times

A Financial Bunker For Scary Times
John E. Girouard  via Forbes  6:30 PM ET

Suppose there was a financial instrument with a track record stretching back 140 years; that was
so solid it could survive the Great Depression intact; that earned untaxed interest at a competitive
rate; that could be borrowed against at will regardless of credit conditions; and that could be used
by individuals as well as major corporations and banks as a safe harbor during economic turmoil?

You'd call it a financial bunker for scary times, and you'd be talking about mutual whole life insurance.

This is not the life insurance that only pays when you die. Mutual whole life is the kind of
insurance owned in the good old days before the stock market began to boom in the 1980s and 1990s. Mutual whole life saw our elders through thick and thin,
and after several decades of being muscled aside by the allure of the stock market, it's making a comeback.

Mutual whole life policies have been an essential part of my financial planning practice for many
years. But I'm astonished at how few of the many investment advisers I meet understand how
mutual whole life policies work, or don't offer them to clients because they aren't sexy or new.

Mutual whole life fell so far out of favor in the 1990s that insurer Swiss Re-issued a report in 1999
headlined, "Are mutual insurers an endangered species?" Not anymore.

Mutual life insurance is making a comeback now that our speculative economy has blown up and
financial disaster is driving people away from risk and back to basics.

Mutual or "participating" whole life insurance is the closest thing to owning your own bank.
As New York Life has said in its ads, "We're Main Street. Not Wall Street."
The concept of mutual unsurance is rather simple, especially compared with the complex annuity products that were so popular until recently. And the benefits include all those listed in my opening paragraph.

Here, for the curious, is Mutual Whole Life 101, or The Life Insurance Policy for the Living:

--You Own The Bank: Mutual insurance companies are owned by the people who buy the
policies. These companies are the modern equivalent of mutual "societies" among European
trade guilds of the 1600s. Guild members pooled their money to help each other and their families
in times of sickness or death. Because mutual companies have no shareholders, they serve one
constituency--the policyholders. Mutuals have no need to report good earnings every three
months to justify a stock price, so there is no pressure for them to take on extra risk to make a profit.

--Your Premium Payments Belong To You: Unlike traditional term insurance, the premiums you
pay for your mutual whole life policy belong to you in the form of the accumulated "cash value" of
your policy. On top of that, the cash value of the accumulated premiums earns interest at a rate
set once each year. In 2008, Guardian Life paid a record 7.3% dividend interest, and those
earnings are untaxed! That's spectacular compared with a 10% decline in the stock
markets, bank CDs paying under 2% taxable, or money market rates under 0.1% taxable.

--You Can Borrow Back Your Premium Payments: Because your premiums "belong" to you as
a policyholder-owner of the company, you can borrow them back any time you want for any
reason you need, regardless of your creditworthiness. The death benefit of the life insurance will
be reduced by the amount you borrow, and you will lose the interest you would have earned. But
you can choose to pay the interest as you would for any loan, except you are paying yourself
instead of the stockholders of a bank. If you pay the loan back as well, the death benefit goes back up.

--Mutuals Offer Ironclad Guarantees: Few people realize that the insurance industry
 was the one sector that made it through the Great Depression without a
disaster and with policyholders financially intact. The cash value and the death benefit are
guaranteed and tightly regulated by the states. That means your cash value is there regardless of
market conditions, and when you die your heirs will receive the full face value of the policy. |

While stockholder-owned insurance companies saw their values fall sharply (remember when
we taxpayers bailed out AIG?), the top mutually-owned insurers saw their book values remain
stable or rise.

--Even Banks and Corporations Buy Mutual Policies: One of the lesser-known aspects of
mutual insurance is that major corporations and banks buy policies on the lives of their
employees and use the cash value to fund employee benefits and as a safe harbor for working
capital. By some estimates Fortune 500 companies and large banks have policies covering some
5 million employees.

Instead of doing what banks say--put your money in our CDs at low rates so
we can turn around and lend your money out at a profit to us--do what banks do.

--Mutual Insurance Is One Leg of The Money Stool: Investing should be approached as a
three-legged stool. One leg is the money you need to live on in the near future (cash in the bank),
one leg is the money you invest for long-term growth (equities) and one leg is the financial bunker
you can retreat to when the rest of the world is falling apart and you can't sleep.

Life Insurance got our grandparents through the Great Depression, and it's going to get a lot of the people
through our current calamity.


John E. Girouard (www.johngirouard.com) is author of The Ten Truths of Wealth Creation, CEO
of Capital Asset Management Group in Bethesda, Md., and founder of the Institute for Financial
Independence, which provides investor education programs to financial professionals.