Selecting whole life insurance
There is a great deal of unwarranted controversy over the purpose, the need, and even the very existence of whole life insurance. Most of this is the result of misnomers and ignorance, often among members of the industry and other financial consultants.
Often, whole life, or any type of permanent life insurance, is thought of as life insurance with a savings component. Cash value within a permanent life insurance policy is not a separate savings account, but simply the result of accumulating excess premium early in the lifetime of a policy in order to pay higher mortality costs later in life without raising the premium. This is no different than in a level term insurance contract, where a fixed premium is paid for the life of the policy. In reality the cost of insurance is much lower early on, and increases with the age of the insured. The fact that cash value does accumulate, earns interest, can be withdrawn or borrowed upon, and receives extremely favorable tax treatment, does offer many advantages for needed cash and tax sheltering; but these are cursory benefits and not the primary purpose for cash value. Strategies using life insurance for any purpose other than providing a death benefit are complex and should only be considered with the assistance of a qualified financial professional.
Do
- seek the counsel of a qualified financial advisor
- decide what you want the insurance to do
- prioritize financial planning objectives within your budget
- select the right type of whole life
- select a participating (dividend-paying) policy
Don't
- listen to anyone who says that whole life is a bad thing
- buy without the assistance of a financial professional
- buy life insurance from your home or auto agent
- buy life insurance over the Internet or phone.
Do seek the counsel of a qualified financial advisor
Life insurance should only be obtained as part of a comprehensive financial plan, with each part of that plan complementing the others. A typical insurance agent is not qualified to provide this type of guidance. Rely on a comprehensive financial planner or advisor to do the policy “shopping” for you, as they should provide unbiased options that specifically fit your needs.
Do decide what you want the insurance to do
This is an extension of Do #1, as are all of these steps. Different types of coverage perform different functions. While the primary purpose of life insurance is to provide income to dependents, different types are more cost effective than others for particular scenarios. In the end, the “cheapest” does not always result in lower cost.
Do prioritize financial planning objectives within your budget
This will help determine how much money is available to pay life insurance premiums. Whole life is often the most cost effective option, but if the premium is too high, it may be appropriate to purchase some or all term insurance that has an option to convert to permanent coverage when the budget allows.
Do select the right type of whole life
This is often a budget consideration. Variations of whole life include products like modified premium whole life, where the policy starts with an internal combination of whole life and term that converts to whole life over time, making the premium initially lower and steadily increasing to a full whole life premium as income presumably increases.
Do select a participating (dividend-paying) policy
Because of the guarantees offered by whole life policies, they are underwritten very conservatively; therefore, premiums paid are typically far in excess of the amounts necessary to pay death claims. The excess premium collected by non-participating companies simply becomes additional profit to the insurer. For participating companies, particularly mutual companies that are literally owned by their policy owners, these excess amounts are distributed back to policy owners; either directly in cash, in the form of paid-up additions (additional death benefit), or applied directly toward future premiums. This is why most participating policies can become self-sustaining (no further premium payments needed) at about the 12-15 year point. It is important to note that dividends are dependent upon the actual amounts paid in death benefits, and are not guaranteed. However, most household-name participating companies have consistently paid dividends each and every year of their existence, many for well more than a century.
Do not listen to anyone who says that whole life is a bad thing
Many, including some who are considered to be financial authorities, contend that any type of permanent life insurance is “too expensive.” They insist that life insurance should be purchased for the lowest possible premium, and the difference between this premium and what would be spent on permanent coverage should be invested for retirement. This philosophy is based upon many potentially faulty assumptions. They insist that there is no such thing as a permanent need for life insurance. This ignores many possibilities, including that an insured may be intending to create an estate for his heirs or that a policy may be used to pay estate taxes or other obligations. Any time there is an intent to provide funds upon one's death regardless of when death occurs, permanent coverage is an absolute requirement, and whole life is the only permanent coverage that guarantees every aspect of the policy.
Do not buy without the assistance of a financial professional
Purchasing life insurance should fit within one's overall financial objectives. Most financial advisers will consult on life insurance at little or no cost. Done correctly, every life insurance decision is complex, with many considerations that may be beyond the scope of a layman's understanding or experience.
Do not buy life insurance from your home or auto agent
This is not necessarily an absolute, but as previously stated, a typical insurance agent is not a qualified financial planner or advisor. He is likely completely unqualified to design a comprehensive financial plan, or to determine where life insurance belongs within one. It may be advantageous to purchase life insurance from one's property & casualty agent if the purchase will result in substantial discounts, but one should examine the actual costs and provisions of the policy, and determine if it in fact will save money. Even in this event one should consult a qualified advisor for a complete analysis supporting the purchase decision.
Do not buy life insurance over the Internet or phone.
By law, premiums for an identical policy from the same company sold within the same state are the same, regardless of the medium used to make the sale. One cannot save money by purchasing through one venue versus another. Some companies have offered “bargain” policies over the Internet, but those policies are either stripped of features or convertibility options, making them less expensive; or are advertised at “low-ball” premiums, such as best-case health risk classes for which many or most applicants will not qualify. Most importantly, one misses out on the most critical step in selecting a life insurance policy; seeking professional advice.
Summary
These guidelines will help in making one aware of a few aspects in selecting a whole life policy, but it is imperative that one seek proper financial counsel to ensure that one’s financial objectives are being met. Potential applications for whole life and other life insurance products are far too numerous to be discussed in this article, but can be assessed quickly and easily by a qualified advisor. Again, most advisers will do this type of planning at little or no cost.
