Whole Life Insurance
Steady Performance For The Long Term
All life insurance was originally temporary (term) insurance. However, because term insurance only paid off if death occurred during the stated term period (premature death), term policy holders were faced with the prospect of paying premiums for 20-30 years and then having nothing to show for those premiums paid once the term expired. Granted, premiums on term insurance are much less than those on whole life insurance, and a term life policy can be used to protect against catastrophic circumstances such as the premature death of the key wage earner in a household with 3 or 4 children. However, in terms of long term financial planning and estate building, I believe whole life insurance to be an irreplaceable element of such an overall plan.
Whole life insurance policies generally require payment of premiums for the life of the policy, although some policies include the provision for "paid up" premiums after a period of years. With the paid up premiums version, once you reach the predetermined point you will maintain the full coverage of the policy without paying any more premiums. Sometimes it is beneficial to continue paying premiums because all of the additional premiums accrue to the benefit of the policy holder, and earn a return which is often better than that provided by banks or brokerage houses.
My preference for an insurance company has always been for a mutual insurance company (owned by the policy holders), as opposed to a publicly traded insurance company whose primary responsibilities are to the shareholders. In a mutual company, all of the owners are policy holders. In a publicly traded insurance company, the owners are simply shareholders who may have no policy with the company but hold the shares as an ordinary investment, looking for a return. The mutual company, much like a credit union, is focused on providing returns and services to the member/policyholders and in my opinion offers the best returns. Life insurance companies use actuarial science in their underwriting procedures in order to set rates which will allow for the company to have adequate funds to invest for future payouts as death benefits. The better companies have proven track records for their investments, generally allocating their funds among blue chip equities, government bonds, and high quality real estate in major market centers. These investments produce returns which help to increase the cash values built up in the policies, and also help to either reduce future premium payments for the policyholder, or to buy additional death benefits over the life of the policy. I believe whole life policies to offer steady performance over the long term of the policy, as well as much needed death benefits all throughout the life of the policy. A major benefit to whole life insurance policies over term life insurance policies is the accumulation of cash in the policy account over the years. This cash may prove invaluable when it is time to meet college tuition payments or to help fund the down payment on the new, larger home. Each policy anniversary, the company will report your current cash accumulations, and also the loan value of the policy. You are able to borrow the accumulated cash at very favorable interest rates, and there are no income tax consequences in taking such a loan. If the policy holder were to die while a loan was in effect, the loan balances are paid off from the policy death benefit, and all remaining funds are distributed to the beneficiary or beneficiaries. Some companies and specifically some policies provide for the payment of additional premiums into the policy during the life of the policy.
One may choose to make additional premium payments during economic times such as we are enduring presently: very low interest rates for savings and higher returns for premiums deposited into life insurance policies. I took the opportunity to buy whole life insurance for all of my children soon after their births. Life insurance rates are based on age and health, among other variables. Therefore the annual premium rates for coverage are very appealing when the policy is taken on an infant and the premiums are paid over a lifetime. Several of my children are now in their twenties and they have been amazed at the growth in values in their policies thus far. The cash values of their policies are now available to them to borrow for a down payment on a home or for continuing education, e.g.
In my opinion, the best way to approach the purchase of whole life insurance is to seek a friend or relative who has purchased such coverage and is extremely pleased with the results, or to ask your financial advisor for some referrals. The BCU Investment Advisors would also be a good source for inquiries on whole life insurance. All in all, whole life insurance can be a very flexible investment vehicle and safe haven for your hard earned dollars.
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©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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