Guide to Buying Whole Life Insurance

In the early days of the modern insurance industry, all life insurance policies were variations of term life. However over time it became apparent that term life insurance had one glaring drawback: people often outlived the term of the policy and had nothing to show for it afterward. Indeed even today well over 90 percent of term life policies issued in the United States lapse before any death benefit claim can be made. It was clear that a more lasting solution was needed.

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Whole Life Described

Whole life insurance was introduced to fill that need. It is the simplest form of permanent life insurance. That is, it is designed to remain in force with a level premium throughout the life of the insured without any regard to age or term after policy issuance. This is accomplished by the all-important “cash value” aspect of whole life insurance.

The policy builds up a cash reserve by means of both higher premiums than a corresponding term policy (which by definition has no cash value) and by interest payments the policy makes to itself. The cash value in turn offsets the increasing cost of insurance as the policyholder ages, allowing for level premiums. In addition loans and withdrawals can be taken against this cash value, meaning the insured can utilize the proceeds of the policy while still living if they so choose.

Given enough time it is possible for the cash value of a whole life insurance policy to equal its face value. This phenomenon is known as the point where the insurance policy matures. In the past this was designed to occur when the insured turned 95 or 100. but more recently issued policies are designed to mature when the insured turns 115 or even 120. This change was made in light of increased life expectancy over the past few decades. In other words, while it is theoretically possible to outlive a whole life insurance policy, it is intentionally highly unlikely.

Who Should Buy Whole Life

Anyone with a permanent insurance need, that is a need that they do not anticipate changing from year to year, should consider a whole life policy. While this would include just about everyone, one should consider that not all life insurance needs at any given time are considered permanent. For example, people at every age should consider a policy to pay for final expenses, but for expenses that may be here today and gone tomorrow, such as a mortgage or for student loans, a term product may be a better, more economical solution. As a result a mix of term and whole life is often the ideal solution for many people. When one asks the extremely important question, “How much life insurance do I need?”, these factors should be taken into consideration.

While there is no hard and fast correlation, in many cases whole life policy premiums tend to run approximately 10 times more than corresponding term premiums. In other words they aren't cheap, especially as one gets older. As such they do require either a large lump sum payment or a long-term monetary commitment to work as intended. If one is strapped for cash one should consider a more inexpensive option such as a term or universal policy.

Choosing a Life Insurance Company

Because whole life insurance represents a significant investment, one should not choose a life insurance company lightly. Research the life insurance companies operating in your state. Check with the state insurance commission to ensure a particular company is properly licensed to do business in that state and is not entangled in any significant or legal problems (this is especially necessary with smaller companies one may not had heard of in the past).

Ask a licensed insurance agent for the A. M. Best ratings of the companies or companies he or she represents, or look them up yourself. An A. M.  Best rating is a third-party assessment of an insurance company's financial strength. A++ and A+ are the best ratings A. M. Best provides; steer clear of any company rated lower than a B+ or which doesn't have a rating at all.

Companies with a national presence which may be good bets for whole life insurance include MetLife, Prudential, Mutual of Omaha, Genworth and The Hartford. In addition quality, competitive insurance products are also offered by many smaller, regional companies. Don't count them out.

When buying whole life insurance, be sure the agent provides you with an “illustration,” or a chart detailing how much you can expect to pay in premium and how much one can expect to accrue in cash value over time. While this illustration is based on certain assumptions, such as that the policy will be issued by underwriting on standard rates, for example, be aware the agent and the company are required to disclose this information before the policy is purchased, as well as at policy issuance if underwriting determines different rates.

Forms of Life Insurance

Whole life policies are available in a variety of options. The basic form of whole life insurance is the fixed whole life product, which accrues its cash value based on a guaranteed actuarial formula. Variable life insurance, on the other hand, accrues its cash value based on investments in portfolios called separate accounts similar to mutual funds.

While a variable whole life policy can accrue cash value quicker than a traditional fixed product, it does pose the risk of losing money for the insured, which in turn can result in policy lapse. As such only insurance agents with the appropriate FINRA securities licenses and appointments with insurance companies specially licensed to issue such products – known as “broker/dealers” – may sell variable insurance policies. Extra documentation, mainly dealing with policy suitability, will be required as well.

Whole life policies also offer different ways to pay. While the premiums themselves don't change, the frequency that they can be paid are optional. Most policies can be paid for monthly, quarterly or annually. In addition, a payment option known as single-pay is also widely available. The single-pay whole life insurance policy may very well be the single most straightforward option an insurance agent can offer: make one payment and the policy is in force for life. Of course a single-pay premium is invariably quite substantial, so it's not for everyone.

Other Options

Whole life needs not just be for adults looking to pass on wealth to their children. Indeed, the children themselves can be ideal insureds for whole life products. It stands to reason that because of their young age, whole life is much less expensive for them; in some cases even a single-pay policy may be affordable to even those of modest means. What's more because these policies are designed to be good for life, they can give them a distinct advantage when they become adults.

Whole life policies can be purchased for charitable purposes as well. Premiums on these policies can be tax deductible. In order to qualify for tax deductible status, in most states the policy beneficiary must be a non-profit charity and made irrevocable, which means the insured can't change his or her mind regarding the beneficiary later. In addition such policies must be underwritten in the same manner as any other life insurance policy. These policies may be subject to other state laws as well; consult with an insurance professional for more information.

Such policies are often purchased using the single-pay option, and may be ideal for providing a lasting gift to a particular charity or for endowing a scholarship.

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