Historically, the average household used whole life policies as a savings vehicle for the criteria already mentioned.
The increase in government intervention in the economy – particularly when it came to money and banking – undermined the ability of the private sector to provide for the financial security of the general public.
Government intervention in the banking system (Fractional Reserve Banking) causes inflation and the boom-bust cycle that continues to plaque market economies.
This political interference hampers the market’s ability to care for the elderly, widows, the poor, etc. Politicians point to “market failure” as proof of the need for their interference.
Credit expansion and inflationary increase of the quantity of money frustrate the “common person’s” attempts to save.
Ludwig von Mises
Before World War I, all major countries were on the classical “gold standard”. This meant they tied their national currencies to a fixed weight of gold.
Fast forward to 1970 US President Richard Nixon took the US dollar off the gold standard and replaced with “fiat” money, meaning paper currencies backed up by nothing.
This led to a surge in price inflation later in the 1970s because removing the gold standard allowed the US Federal Reserve to remove the shackles from their printing presses.
This radical transformation in American monetary policy had a profound effect on the financial behaviour of ordinary households.
The dollar-denominated guarantees of Whole Life insurance were seen as less reliable once consumer prices began increasing at high and unprecedented rates.
Mutual Funds, “Tax-Qualified” Plans
Further, with the innovation of mutual funds, the conventional wisdom eventually argued that the “smart move” was putting one’s savings into Wall Street and Bay Street.
The move was also encouraged with the subsequent rise of US “tax-qualified” plans in 1974.
High inflation in the late 1970s and into the 1980s resulted in people looking at the returns they were getting in their Whole Life policies.
For those who wanted short term liquidity, short-term bank GICs seemed a better bet amidst high and volatile price inflation, since investors could jump in and out of the short-term market depending on interest rates.
In contrast, people holding mature Whole Life policies would be reaping returns based on portfolios of “old” bonds, issued at a time when price inflation, caused by the government, had not been so volatile.
Further, in 1979, the Federal Trade Commission (FTC) issued a a scathing report that castigated Whole Life as a poor savings instrument that provided paltry returns and lack of information for the consumer.
So, to pass the blame from the government, the government threw the life insurance industry under the bus by conveniently withholding key information from the public that Whole Life insurance is a long-term play.
Furthermore, activists like Ralph Nader, A. L. Williams, and Primerica, saw an opportunity to persuade many people to surrender Whole Life policies to buy term insurance and mutual funds.
Also at the time, Universal Life (UL) insurance made its entrance promising the same benefits of Whole Life but with more flexibility and transparency. In the high interest rate environment of the early 1980s, new UL policies seemed superior to previously issued Whole Life policies, but this proved illusionary for many consumers once interest rates fell.
1986 Tax Reform Act
In 1986 the U.S. government did an overhaul of its tax act. In the end the changes made tax experts recommend Whole Life insurance. Whole Life insurance remains a conservative, reputable vehicle that offers modest but consistent (and guaranteed) returns, with favorable tax treatment, and yet also provides liquidity in the form of policy loans. After being seduced by the stock market and real estate, many wealthy individuals rediscovered what their grandparents knew.
These U.S. events filtered into in Canada.
Government & Activists Guilty
Proof shows the government and activists were wrong and people and businesses lost billions of wealth that they would have had, had they not followed their incorrect and misleading information.
Lessons to be learned from this include:
• Do not trust governments and activists.
• Do your own research.
• Avoid tax-infected assets and assets you cannot access without penalties.
Sound money is money that is not prone to sudden appreciation or depreciation in purchasing power over the long term. This means Whole Life insurance is “sound money”. Stocks are not.
There is nothing foolish about using Whole Life policies as part of one’s financial planning. This was the standard households through the 1950s, and in the late 1980s. The government had to take action to discourage rich people from putting so much of their money into Whole Life insurance. (How does Dave Ramsey explain that?)
Whole Life insurance is so all-encompassing that it is not too far-fetched to say that if you could only select one, no other strategy will ever be needed to get the desired financial results.
The above includes excerpts from the book The CASE for IBC written by R. Nelson Nash, L. Carlos Lara, and Robert P. Murphy PhD. You can buy the book here: https://thecaseforibc.com/