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The true value of Whole Life might surprise you

A new simulation bolsters the case for an under-the-radar asset—one that protects as it grows.

Sean Madgett | New York Life Insurance Company

There’s a concept in behavioral economics known as “narrow framing bias.” It’s an academic term for a fairly basic idea: People don’t always consider every variable when making a decision. It’s particularly perilous in financial planning, which requires holistic consideration of numerous overlapping objectives and the many strategies and products that you can use to achieve them. Take too narrow a view toward any one product, strategy or outcome, and you risk making critical decisions on incomplete information.

“It’s the mental equivalent of looking through a keyhole,” says Shlomo Benartzi, a behavioral economist and professor emeritus at UCLA. “We see only what’s directly in front of us, and miss everything beyond the frame.”

It's likely due to this bias that even sophisticated investors tend to overlook a versatile asset when assembling their financial plans: whole life insurance.

People looking through a keyhole

A Holistic Product for a Holistic Plan

Many investors decouple insurance and investments, purchasing insurance policies to meet their short-term needs and then assembling a portfolio using traditional asset classes like stocks and bonds. But with whole life insurance offering protection, growth, tax advantages and liquidity—all essential components in a holistic financial plan—it warrants a second look as you assemble your plan.

To assess its potential role in a portfolio, Benartzi made a head-to-head comparison between whole life and a diversified bond portfolio in a white paper commissioned by New York Life. Using a series of Monte Carlo simulations, he compared the relative value to Eric, a hypothetical 41-year-old investor considering whether to invest a little over $100,000 in a bond portfolio or a whole life policy. 

The result depends on how narrow your frame is. 

When considering only the minimum cash value of the policy, the bond portfolio “wins” in the majority of simulations. But as he widens the analysis to consider the full range of benefits, the full value of whole life emerges. These benefits include: 

  • The policy’s death benefit. As this is a permanent policy, it’s guaranteed by the claims-paying ability of the issuer.
  • Dividends applied as paid-up additions to cash value. Dividends are not guaranteed, but well-established insurers tend to have a consistent track record of paying dividends to policy owners; New York Life, for instance, has paid dividends every year since 1854.
  • Tax advantages. The death benefit is distributed generally free of federal income taxes; the cash value grows tax deferred; and you can access the cash value in a tax-advantaged way so long as the policy is not overfunded according to IRS standards.

Once these benefits are taken into account, the whole life policy has the potential to outperform the bond portfolio in the vast majority of simulations.1

Look through the keyhole, and you don’t get the full picture. Open the door, and it’s a different story.

Benefits Beyond the Numbers

Whole life also plays an important role that isn’t necessarily captured in the numbers: providing security and peace of mind for you and your family. 

Like all life insurance, it provides the assurance of knowing that your family will be cared for after you’re gone. And because it’s a permanent policy, you know you’ll be able to leave them a financial legacy even if you pass away long after purchasing the policy. 

Once you’ve entered retirement and your needs have evolved, it also provides peace of mind by backstopping your retirement income plan. Many financial advisors use the cash value as a buffer asset—an alternate source of retirement income that you can tap during bear markets, sparing you from having to sell equity-based investments and lock in your losses.2 And with the worst impacts of market volatility in retirement mitigated, you may be able to be more aggressive with your traditional asset classes later in life, potentially providing the growth you need to counter inflation and longevity risk. The peace of mind of knowing that you can weather a bear market, and that you’re less likely to outlive your money, is immensely valuable.

The best financial plan doesn’t just chase growth, nor does it consider market returns in isolation. Rather, it needs to account for all possible benefits and downsides to each approach and meet your family’s holistic needs—protection, growth and peace of mind.

Living confidently starts with seeing the full picture.

A New York Life financial professional can help you build a plan that balances growth, protection, and peace of mind, so your assets work together to support every stage of life.

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1Bonds and whole life insurance each have a role to play in a diversified portfolio, and have complementary advantages. Bonds are highly liquid, transferable investments. Bonds generally return their principal if held to maturity. And, of course, bonds do not involve the cost of insurance. The results referenced are hypothetical and based on simulations that evaluate probabilities of results. The results are not based on past or future performance of any product or client. Probabilistic simulations, while useful in identifying a range of possible outcomes under a wide range of conditions, are inherently uncertain and not a sole basis for an investment or insurance decision. Simulations do not account for all the factors that affect performance, such as how policies are managed by policyholders in reality and other factors. See the white paper for the full methodology and important information.

2Accessing the policy’s cash value will reduce the available cash surrender value and the death benefit.

SMRU 8596691 Exp. 11/12/2028