10 Things To Know About Whole Life Insurance

My Comments: I’ve been licensed to sell life insurance since early in 1976. During this almost 40 year span, arguments have come and gone about the relative merits of life insurance, and what kind you should buy, if you should buy it at all.

Many of us in this business are profoundly distrusted by those whose first focus is the accumulation of wealth and their perceived sense of being “sold” something that was not in their best interest. I don’t doubt that this has happened to many people. Few of us have done this deliberately.

The problem is that at any point in time, no one has any idea how life is going to play out. As it does play out, it’s much easier to look back and decide choice A was wrong and choice B would have resulted in a better outcome. Or you can attempt to make statistical predictions about the future, play the odds, and hope for the best.

The 10 things reference here are too much to include in one blog post. So at the bottom, I’ve given you a link where I found this information. The authors are highly respected professionals and what they have to say may help you make better choices as your life plays out.

Sep 15, 2014 | By Stephan R. Leimberg, Robert J. Doyle, Jr., Keith A. Buck

Whole life insurance, as the name implies, is a contract designed to provide protection over the insured’s entire lifetime. There are many types of whole life policies, but the oldest and still the most common type of whole life policy is ordinary level premium whole life insurance, or simply ordinary life. This form of insurance is also known as “straight life,” “traditional whole life,” or “continuous premium whole life.” If the term “whole life” is used alone, it is generally accepted that the reference is to ordinary level premium whole life as opposed to any other type of lifelong policy.

This type of contract features level or fixed periodic premiums computed on the assumption that the policyowner can retain the policy for the life of the insured. The death benefit remains level throughout the lifetime of the contract. Insurers invented the level premium concept to make the whole life contract affordable for as long as the policyowner decided to keep it.

As an outgrowth and natural byproduct of the fixed and level premium, the whole life contract develops cash values. These values reflect the reserve the insurer needs to accumulate in the early years of the policy’s life so that they will have sufficient money (together with interest earned on the reserve) in later years to pay the promised death benefit while keeping premiums level. Absent this reserve, the level premium would be insufficient to pay the increasing mortality costs as the insured ages. The policy contains a fixed and guaranteed schedule of the cash values that the policyowner may borrow for any reason (such as an emergency or opportunity) at any time, or take upon surrendering the contract.

The policyowner agrees to pay a fixed or level premium at regular intervals for the rest of the insured’s life (generally only up to age 100, if the insured lives that long, or in some cases, to age 95). In return, the insurance company agrees to pay a fixed death benefit when the insured dies if the policyowner has continued to pay the premiums. Policyowners who discontinue paying premiums and terminate their policies are entitled to the scheduled cash surrender value.

1. Who needs whole life insurance?

In general, some type of life insurance is indicated when a person needs or wants to provide an immediate estate upon his or her death. This need or desire typically stems from one or more of the following reasons:
a. To provide income for dependent family members after the head of household dies until they become self-supporting.
b. To liquidate consumer or business debts or mortgages, or to create a fund that would enable the surviving family members to service the debts.
c. To provide large amounts of cash at death for children’s college expenses or other capital needs.
d. To provide cash for federal estate and state inheritance taxes, funeral expenses, and administration costs.
e. To provide funds for the continuation of a business through a “buy-sell” agreement.
f. To indemnify a business for the loss of a key employee.
g. To help recruit, retain, retire, or reward one or more key employees through a salary continuation plan and to finance the company’s obligations under that plan to the dependents of a deceased key employee.
h. To fund bequests of capital to children, grandchildren, or others without the erosion often caused by probate costs, inheritance taxes, income taxes, federal estate taxes, transfer fees, or the generation-skipping transfer tax.
i. To fund charitable bequests.
j. To preserve confidentiality of financial affairs. Life insurance proceeds payable to someone other than the deceased’s estate are not part of the probate estate and are not a matter of public record. It is not unusual for a beneficiary to be a lover, illegitimate child, or to have some other relationship to the insured that the insured may not want to publicly acknowledge. Likewise, the insured may not want the amount payable to the beneficiary to become a matter of public record.
k. To assure nearly instant access to cash for surviving dependents. Insurers generally pay life insurance proceeds to beneficiaries within days of the claim. Because insurance benefits do not need to pass through probate court and are not taxable, there is no delay in distributing the assets to the beneficiaries.
l. To direct family assets to family members in a way that minimizes state, local, and federal taxes.
m. Level premium whole life, in particular, is the preferred type of policy when the need is long-term and there is a desire to maintain a relatively fixed annual premium cost. For many families, it is the most “affordable” form of long-term coverage on the principal breadwinners.
n. Level premium whole life may satisfy various business related life insurance needs (e.g., financing vehicles for buy-sell agreements, key person insurance and nonqualified deferred compensation arrangements). It is especially suitable if the objective is also to receive tax sheltered returns and the company has accumulated earnings problems. The cash buildup in life insurance policies held for legitimate business purposes is not counted towards the accumulated earnings limitation.
o. Level premium whole life insurance is often the preferred type of insurance for split dollar arrangements.
p. Level premium whole life is a tax-sheltered way to finance post-retirement health insurance for a selected group of executives or key employees by using life insurance policies on their lives. Cash values are available to the corporation to help meet future cash needs for health insurance premium payments for retirees. When the employee dies, the corporation receives the death proceeds free from federal income tax (except for some potential alternative minimum tax liability). The corporation is reimbursed for part or all of its costs for the post-retirement health insurance. Corporate Owned Life Insurance (COLI) offers certain advantages over other methods for recovering post-retirement health insurance liabilities.