Blue-water sailing refers to open-sea sailing, such as ocean crossings, where one is unable to put in at a sheltered harbor to avoid heavy weather. When storms bear down, a sailboat and its crew must be able to ride out the event, sometimes trimming all sails and simply absorbing the punishment of violent winds and heaving seas until the storm passes.

If you are a casual sailor just developing an interest in blue-water sailing, you probably don’t crave the experience of 24 hours below deck while 30-foot waves toss you around like a t-shirt in a washing machine. You’re more likely thinking about how your boat will perform in fair weather with favorable breezes. But if you’re heading into blue water, you want a vessel designed to survive the worst the ocean can throw at you, because in the words of an experienced sailor, “When you’re in Blue Water, the only thing you have is your boat.”

Blue Water and Life Insurance?

There is a blue-water parallel in the design philosophies underlying “permanent” or whole life insurance: Fair-weather performance is a factor, but the most important design elements are the ones that will help you ride out financial storms and get you safely to your destination. From a blue-water perspective, it’s the guaranteed features, benefits and flexibility that make a permanent life insurance policy seaworthy.

Yet the prevailing financial culture that exalts rate of return and accumulation as performance measuring sticks often obscures the blue-water characteristics of permanent life insurance. Minimizing the protection features, permanent life policies are often assessed solely as “investments,” with comparisons to various accumulation vehicles from CDs to mutual funds.

Life insurance companies inadvertently facilitate this myopic approach by producing ledger illustrations showing projected cash values for 20, 30, 40 years, or longer. For many prospective buyers of permanent life insurance, a ledger illustration is their primary reference point, not only relative to other accumulation options, but also in determining how to construct the policy. This is a flawed method for designing and selecting a life insurance policy. While cash values are certainly a valuable component in permanent life insurance, projected values are hardly the definitive issue.

The three-decade trend of declining interest rates is reflected in the results of each insurer. At various times over 30 years, each company has been “first,” but no company can claim they “beat the market,” or delivered returns superior to their peers. Whatever the projected illustration numbers might have been, actual performance has been markedly similar. In blue-water terms, there’s little to distinguish the fair-weather results posted by each company.

Blue Water Essentials Aren’t on a Ledger Illustration

Every ledger illustration is a fair-weather assumption: You will live a long time, have good health and fully fund the policy. There is no accounting for a financial “storm,” like a market downturn, a disability, a loss of income, a legal entanglement, a premature death or a terminal illness. But properly outfitted, a true “blue-water” permanent life insurance policy can be invaluable in riding out these rough stretches.

If the fundamental guarantees regarding premiums, cash values and insurance benefits constitute the hull of a blue-water life insurance plan, these pieces are the rigging, items essential to keeping your financial plans afloat under duress:

• A Waiver of Premium for Disability ensures the policy stays in force, and continues to accumulate cash value. This benefit often serves as “savings” insurance; while disability insurance may replace a portion of income, this waiver guarantees that some accumulation will continue as well. An “Own-occupation” waiver further enhances this benefit.

• Flexible Paid-up Addition (PUA) features allow for irregular additional premium payments. This option can accelerate cash values, allow for the deposit of lump-sums or systematically increase the insurance benefit—without requiring additional evidence of insurability.

• Guaranteed Increase Options permit policyholders to add coverage at later dates without the need for additional underwriting. If your financial risks get bigger, your benefits can adjust to cover them.

• Long-term Care riders and accelerated benefits provisions for chronic illness and terminal conditions mean insurance benefits can be accessed prior to death on a contractually guaranteed and tax-favored basis.

• Low, fixed loan rates, particularly for policies more than 20 years old or for insureds over 65, provide financial certainty for those who may want to systematically withdraw cash values to supplement retirement income.

• One insurer (Guardian Life) even permits dividends and PUAs to be allocated to equities-linked indexes, while maintaining the safety of the guarantees of a whole life contract.

For those who appreciate the utility and long-term value of permanent life insurance, these are the blue-water features that should influence a buying decision, not a ledger illustration. And excepting Guardian’s index feature, the six companies listed in the dividend chart all offer these critical design elements.

But the particulars of these blue-water life insurance features can vary significantly, particularly for PUA transactions and disbursements for long-term care and terminal illness. It is essential to know that each policy has the right combination of riders and contractual provisions (especially in cases where it seems desirable to divide the risk between two insurers).

Don’t See Blue Water in Your Future? You Never Know

Some people try to skirt the blue-water design process. They say, “I’m not planning to go there. What I have should be good enough.” But just like a quickly rising storm can surprise a day sailor and carry him to deep water, your finances can be dragged out to sea, where the only financial asset that is still functioning is your permanent life insurance policy.

In order to reach your financial objectives, you may have to survive some storms along the way. With an insurance policy designed for blue water, your projected cash value accumulation may not finish first, but you can complete the voyage.

1. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claim-paying ability of the issuing insurance company.

2. Dividends are not guaranteed and are declared annually by the company’s board of directors.

3 Riders may incur an additional cost. Rider benefits may not be available in all states.

4. PUAs are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy.

By Elozor M. Preil