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A Quick Look at Whole Life Insurance
Posted on October 30th, 2009 No commentsAuthor: Dennis Jarvis
Source: isnare.comThe name of this site is etermlifeinsurancequote.com for a reason…term is the most affordable way to insure against the risks that accompany someone passing away early. This begs the question…what about the main alternative, whole life insurance? That’s a good question and it’s really the first question to answer in order to make an informed decision. Let’s look a little closer at how whole life insurance works (and doesn’t).
Whole life is exactly what it says. The protection of whole life will continue as long as the premium is paid (whether by you or by the policies cash value/dividend). You are protecting the insured for his/her entire lifetime. Suffice it to say, whole life policies always pay out. There will always be a benefit paid regardless of whether a person passes away tomorrow or at age 90. To many people, this a reassuring thought and addresses the most common misunderstanding of insurance…”What if don’t pass away during the period of term life I purchased and I paid all that money?”. This is akin to the “What if I never get sick” argument with health insurance and it shows a critical misunderstanding of how insurance works and our views of risk and probability. Read that last sentence over and the let’s look at how the life insurance companies came up with a way to satisfy this basic fear much to their financial benefit…whole life insurance.
So you’re now a life insurance executive in charge of new plans for the company. There’s plenty of jokes I can enter here but it’s too easy so we’ll move on. People in marketing are telling you about this strange fact that people like to get something for money they pay and a lot of the population doesn’t purchase life insurance because they very well may not get anything. Even though those people know the risk of going without, they can’t get past paying money now for some possible benefit in the future. There’s a disconnect. Voila…whole life insurance. You pitch it to the company and they think you’re crazy. “We can’t insure against a risk that has a 100% chance of happening…we’ll either have to charge the full amount (plus profit, overhead, inflation, etc) or go broke!” Well, let’s just say the carrier didn’t go broke by selling whole life insurance. In fact, it’s one of their most profitable types of insurance and life insurance brokers are pretty excited to show you whole life as well. Perhaps they just all feel it’s a better product or maybe they understand that some people will go without life insurance all together if there isn’t something more tangible for the money they pay. You may agree with this but understand that you are paying significantly to do so.
How does the company 1) offer whole life considering the fact they will have to pay out and 2) attract people to purchase whole life due to the cost resulting from item 1? To answer question #1, the carrier has to charge considerably more money to offer whole life. You can think of it this way. Let’s look at $100K benefit. One way to think of it is that they will charge you $100K plus a certain percentage to cover profit, overhead, inflation, cash value (we’ll discuss later) over your statistically expected remaining years. That’s a lot of money you have to pay and this is the reason whole life is so much more expensive than term. To some extent, you’re paying a dollar to get a dollar (actually less than).
As to question 2, how does the carrier attract people to buy this much more expensive life insurance policy? The first way goes to the disconnect that caused the company to create whole life in the beginning. The guarantee of a benefit. “Why would you pay money and get nothing in return with term” is likely the pitch. But they need more to “sweeten” the deal. What if your policy builds up a cash value that you own. We’ll take some of the extra premium and give it back to you over the course of the policy. At some point, the cash value and/or dividends can even pay the premium of the policy. Now, people are satisfied. Yes, they are paying a lot more but they will get some of back. The problem is that they will get a lot less of it back than they pay relative to the cost of term life.
If you’re absolutely adamant about the “whole life” length of protection for whole life, then by all means. We can help you in this regard. We just think it’s important to get an impartial understanding of what you are paying for. Insurance, at it’s core, is about insuring the probability of a risk. Anything that strays from this framework quickly approaches something else and usually at your expense.
Dennis Jarvis is a licensed insurance agent concentrating on term life insurance. Shop, compare, and instantly quote multiple carriers with professional guidance and resources.
Uncategorized cash value, insurance, life, life insurance, money pay, whole life, whole life insurance -
Cash Value and Life Insurance Policies
Posted on October 20th, 2009 No commentsAuthor: Dennis Jarvis
Source: articlesbase.comf you’re shopping for life insurance long enough, you’re bound to come across the term cash value. It’s typically a function of how whole life insurance is designed. As we discussed in our whole life insurance article, the cash value bell and whistle may be just that but it’s important to dig a little deeper and understand how it works and why it’s a part of life insurance policies at all. Let’s look closer at the cash value component of whole life.
My father-in-law was an old New York Life agent right out of college. He’s been an insurance broker (now independent) for more than 40 years now. That’s persistence! His daughter (my wife) has some small whole life insurance policies that were taken out when she was very young by her father. We still get the statements which run through the premium paid, life benefit, and….whole life cash value. She’s had the policy for years (decades) now and that cash value amount is not that great. What is it and why is it even there?
When you buy a whole life policy, a small percentage of your premium will go towards your policies cash value which is similar to an account you have within you life policy. It is your asset and you can even borrow against it. If the amount becomes high enough, you may be able to pay the premium with the interest or dividend that this amount earns. In our opinion, it amounts to an expensive savings account built right into your policy which begs the question…why have it at all. Why not charge less money for the life insurance premium and skip this whole cash value step all together?
First, the cynical view. Whole life insurance is quite a bit more expensive than term life and people have trouble departing with money. If you can tell someone comparing life insurance plans that some of the premium will be given back to them in the form of cash values accumulating in the policy, it makes parting a little easier. You can even say that at some point in the future, the cash value will high enough to pay the premium. That sounds great when you sitting around a table contemplating a very large whole life insurance premium payment. To some extent (here comes the cynicism), why not reduce that expensive premium payment and just let a person invest or save the difference themselves? That’s wouldn’t sell many whole life policies, now would it.
Okay, we’ll assume all is right with the world and look at any positives we can find with the cash value concept. Usually, you can borrow against cash value for periods of time. You’re essentially borrowing from yourself and paying interest to yourself but that’s how it’s structured. The money that accumulates is typically tax-deferred. If a business is paying the premium, these cash value amounts borrow might not be subject to tax but ultimately, the loan should be paid back to keep the policy in good standing. Indeed, the cash value may one day be large enough to pay the premium but so might separately invested funds saved by buying term life and investing/saving the rest. The argument seems to be whether the gain is higher within the life insurance company’s control versus out (say through your bank or investment brokerage).
We don’t see how that’s possible and we’re left with the fact that cash values, dividends, and the like are just different shades of lipstick on a pig. People like to get something for money they are paying and in our opinions, cash values address this psychological need more than a financial need. If you absolutely need to have life insurance for your entire life and guarantee some benefit is paid to your loved ones then whole life might be a good fit. Just realize it comes at a cost.
Dennis Jarvis is a licensed insurance agent concentrating on term life insurance. Shop, compare, and instantly quote multiple carriers with professional guidance and resources.
Uncategorized cash value, life insurance, whole life cash value, whole life insurance