Anything Else Consumers Should Keep In Mind
Damon Gonzalez: If you are going to purchase a whole life policy, there is a plethora of riders and acronyms involved, and you should hire an honest advisor who has experience designing policies to maximize cash value. The advisor will need to access different insurers illustration software to design the best policy for you based on your health, age and how much you want to save. You can receive drastically different illustrations from agents that represent the same company, so dont be afraid to shop around.
Optimizing a policy for a client often means blending in term insurance into the whole life policy. This pays the agent less commissions and puts more money in your policy. Unfortunately some agents aren’t willing to present these policy designs.
Steven Elwell: Consumers should keep in mind that many people calling themselves financial advisors have a financial incentive to sell whole life insurance as a retirement strategy when other avenues have yet to be utilized. I would caution investors that buyer beware should apply when an advisor appears to be pushing a product without reviewing other, less-costly options.
Brian McCann: If you dont need permanent insurance, term insurance is a very affordable option. You can invest the money you save on premiums to build a retirement nest egg. If you havent maximized your tax-favored accounts, such as an IRA or 401, then you can also get tax benefits on your contributions.
Consider The Pros And Cons Of Other Life Insurance Options
There are a lot of ways to evaluate the relative benefits of whole life insurance and other types of life insurance. To make the process more straightforward, were dividing it into two parts: First, well compare permanent whole life to temporary term life insurance, then well compare it to other forms of permanent life insurance.
Compared to a term life insurance policy, whole life provides more comprehensive financial protection that lasts your entire life: It can never be canceled as long as premiums are paid the death benefit will never go down the cash value will always grow at a guaranteed rate also, you or your beneficiaries are assured of an eventual payout, so you may feel youre getting more value for your premiums. On the other hand, if you just need a death benefit to protect your familys finances for a limited time for example, while children are still at home a term life policy can be a less complex, lower-cost choice. But once your policys term is over, it will have no value. If you want continued protection, youll have to apply for a new policy with potentially higher premiums because youll be older.
Heres a summary of some of the other features and differences between the two types of policies:
Guaranteed universal life
When Would Whole Life Insurance Be A Good Investment
Steven Elwell: For very-high-income people who have maxed out their 401 plans, IRA and Roth IRA options, a whole life insurance savings strategy can make sense, especially if they have a need for life insurance. Another viable option for high-income individuals could be the use of a tax-deferred, nonqualified annuity if they dont have a need for life insurance.
Damon Gonzalez: I typically recommend this strategy to people who are already maxing out their 401 plans, Roth IRAs and 529 plans . The cash value is protected from creditors in many states. It also makes sense for someone who has built a good nest egg and wants to diversify part of his or her portfolio into permanent insurance. If you are in a high tax bracket, are risk-averse and will be happy with bondlike returns, you should look at whole life.
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Whole Life Key Fact : Not All Of Your Premium Is Used For The Savings Account
This important permanent consideration is very similar to point number two from above. Marketing and Commission expenses take a huge bite out of any potential cash value that could build up in your account. Mortality expenses also take a chunk out of your yearly premium.
In the above example you can clearly see this. Note not all permanent life insurance policy are exactly similar to this, however this is a fairly common example. In the above example you can see how after two years of spending over $9,000 on a whole life contract that NO cash value builds up in those first two years, none. It is only in year three that a small amount of cash begins to accumulate.
“Investing” in whole life insurance is nothing like investing in a stock mutual fund nor bank savings account. Do not be confused. “Investing” in a permanent life insurance policy is in reality buying a life insurance policy with a small separate sub account that may accrue a small interest in some distant future.
This is not to say that you cannot earn a fair rate of return on a par life insurance policy, however it is certainly not a short term savings account. In reality participating policies are the longest of possibly most investment options.
Indexed Universal Life Insurance Faq
How does an indexed universal life policy work?
The policy premiums you pay fund a death benefit and a cash value component, which grows according to an interest rate set by the life insurer based on the performance of a specific stock index.
Is indexed universal life a good investment?
IUL is not the best investment for most people. There is potential for large investment gains, but performance can be unpredictable compared to traditional investing and it will cost more than a term policy. While IUL policies have a guaranteed minimum interest rate, your rate may also be capped so that your growth is less than youâd get from investing separately.
Can I cash out my indexed universal life policy?
You can withdraw from the cash value of your indexed universal life policy up to the amount youâve paid into it without incurring fees or taxes. You can also cash out your policy entirely by surrendering it and forfeiting your coverage. You may also be able to take a loan against your policy.
What happens to my cash value after I die?
Your cash value is meant to be used while youâre alive, so it usually stays with the life insurer if you die. Some more expensive permanent policies allow you to pass the cash value on to your beneficiaries along with your policyâs death benefit.
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My Personal Experience With Insurance
For the longest time, I hated paying for insurance. It seemed like a waste of money. You pay a company a monthly fee just in case something were to happen. And life insurance, do I really need it?
I remember when I got in my first car accident. I was delivering pizzas in college and a car in front of me decided to make a left turn immediately after passing through a green light.
It wouldnt have been as big of a deal, but the guy did not pull all the way into the center lane. This left the right rear of his bumper still in my lane.
I thought about moving over one lane, but there was a car on the other side of me so I couldnt. I ended up clipping his bumper and doing everything I could to not hit another car.
At that moment, I was flooded with emotions of fear and anxiety.
I was just a college student, how I was I going to pay for the repairs?
I had never had $1,000 in a bank account and even paying for things in college was a struggle that is why I was delivering pizzas in the first place.
Between the two cars, the cost was thousands of dollars.
Well, thankfully I had car insurance, so they paid the guy directly for his damages. I decided not to get my car fixed because I still had a thousand dollar deductible.
Why do I tell you this?
Because if I did not have insurance, I would have had to pay everything out of pocket with money I did not have. This is why insurance is so important.
Guaranteed Cover For Life
Whole of life insurance doesnt lie. When looking at how a whole of life policy works, there are no hidden catches or small print in the footer to invalidate your claim at any time, it does exactly what it is expected to guarantees cover for life.
No one can know what is going to happen to them in the future, but a whole of life insurance policy will make one thing certain your death wont leave your family struggling.
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Pros And Cons Of Permanent Life Insurance
There are many arguments in favor of using permanent life insurance as an investment. However, many of these benefits arent unique to permanent life insurance. You can often get them in other ways without paying the high management expenses and agent commissions that come with permanent life insurance. Here are a few of the most widely advocated benefits of permanent life insurance.
Dont Wait Until You Need Life Insurance To Get It
Look, this stuff isnt easy to think about. But the truth is, life is precious! We cant see the future and arent promised tomorrow. The cost of not having a plan in place for the unthinkable is much higher than the cost of term life insurance. You need to keep your loved ones protected.
The ideal time to buy life insurance is when youre young and have a clean bill of health, especially because life insurance companies are all about weighing the risks of the person purchasing the policy. If youre in the market for new life insurance or want an expert to talk to, we recommend RamseyTrusted provider Zander Insurance. Dont let another day go by without being protected. Start here to get your term life insurance quotes.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Factors In Whole Life Insurance Pricing
The coverage amount you choose will help determine your rate, along with:
- Age and gender
- Past and current health conditions
- The health history of your parents and siblings
- Nicotine and marijuana use, including nicotine patches and gum
- Substance abuse
- Driving record
- Dangerous hobbies and activities (such as piloting planes or rock climbing
For whole life, there are a variety of other features and provisions that can affect costs as well, such as:
- Payment period: You can choose to pay for the entire policy in a short time frame, such as 10 or 20 years. The premium would rise substantially given the front loading of payments.
- Guaranteed return rate: Some companies offer a higher guaranteed return, which can result in higher annual premiums.
- Dividend crediting: Many whole life policies pay out a dividend, and policyholders can choose how to receive it. Receiving your dividend payments as a credit toward premiums reduces your annual out of pocket cost.
What Happens To Whole Life Insurance At Age 100
Many whole life insurance policies are written to expire at age 100. But if you live longer than that, you have a couple of options. For instance, if you are younger than 85, you could do a 1035 exchange into a new policy that lasts until age 121. And if youre in your 90s, you may be able to do a 1035 exchange into a deferred annuity with the cash value of your policy. But before you do anything, you should talk to your financial planner and insurance agent to help you make the best decision.
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Term Life Insurance Policies
These run for a fixed period of time, known as the term of your policy, such as five, ten or 25 years. They only pay out if you die during the policy.
There are three kinds of term life policies.
Cons Of Term Life Insurance
When you buy a term policy, all of your premiums go toward securing a death benefit for your beneficiaries. Term life insurance, unlike permanent life insurance, does not have any cash value and therefore does not have any investment component. If you’re still alive when the term ends, the policy simply lapses and you and your beneficiaries don’t see any money.
However, you can think of term life insurance as an investment in the sense that you are paying relatively little in premiums in exchange for the peace of mind knowing that in the event of your death, your beneficiaries will receive a relatively large death benefit.
If you are interested in a policy for a fixed period with a built-in savings mechanism that rewards you for your payments later on, a return of premium life insurance policy may be an attractive option. You’ll pay a flat rate for the duration of your policy, but unlike traditional term life insurance coverage, you’ll get all your money back at the end of the term.
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Cost Comparison: Term Vs Whole Life Insurance
Lets say we have a friend named Greg whos in his 30s and wants to secure $250,000 of life insurance for his family. He meets with a whole life insurance agent who pitches a $260-per-month policy that will include the insurance coverage, plus build up savings for retirement .
On the other hand, a term life agent tells Greg he can get a 20-year term with $250,000 of coverage for about $13 per monththats a $247 difference compared to whole life.
If Greg goes with the whole life, cash value option, hell pay a hefty monthly premium. But its because the part of his premium that isnt insuring him is going toward his cash value investment, right? Well, youd think, but then come the fees and expenses . . .
In truth, the additional $247 per month disappears into commissions and expenses for the first three years. After that, the cash value portion will offer a horrifically low rate of return for your investments .1
You see, only Greg was entitled to the money in that savings account, so he would have needed to withdraw and spend it while he was still alive. Talk about pressure! Unfortunately, Greg died before he had the chance. Now Greg is rolling in his grave as his insurance agent is staying in a five-star resort on Gregs dime.
Lets recap term vs. whole life insurance by looking at the pros and cons.
- Is way more affordable
- Gives you the option to invest however you prefer
- Allows you to move toward becoming self-insured
But whole life:
What Is Universal Life Insurance
Universal life insurance policies offer flexible premiums that may allow you to adjust how much you’ll pay each year by accessing some of the policy’s cash value . Depending on your policy’s potential cash value, it may be used for a premium payment, or be left alone with the potential to accumulate value over time.
Potential growth in a universal life policy will vary based on the specifics of your individual policy, as well as other factors. When you buy a policy, the issuing insurance company establishes a minimum interest crediting rate as outlined in your contract. However, if the insurer’s portfolio earns more than the minimum interest rate, the company may credit the excess interest to your policy. This is why universal life policies have the potential to earn more than a whole life policy some years, while in others they can earn less.
A universal life insurance policy might be a good choice if you want:
- The flexibility to adjust your premiums and coverage amounts**
- Cash value that you may be able to borrow from while you’re still alive
- Permanent* life insurance protection and access to cash values
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Whole Life Key Fact : Dividends Are Not Guaranteed
Permanent life insurance dividends are not truly guaranteed pay outs. Contrary to what numerous insurance agents say – most insurer contracts do not guarantee them. How can they? To better understand whole life dividends you must first understand what a dividend is. Dividends are paid out from participating life insurance companies. These companies use their profits to pay dividends to policy holders. If there is no profit for a given year, than there can be no dividend. Most of the better Participating carriers state that they have paid out policy dividends for dozens of years and this is often the case However just because an insurer has paid out policy dividends for thirty years is no guarantee that it will continue to do so.
In fact when considering this as an investment this is can be a very foolish assumption. General Electric was the only company continually listed on the list of Dow Jones Industrial Average for over hundred years until… it wasn’t. Kodak was also a member of Dow Jones Industrial Average until it also wasn’t and then in 2012 it filed Chapter 11 which is a form of bankruptcy. Assuming that the future will be similar to the past is not guaranteed, and neither are permanent life insurance dividends.