Proposed edits to "Whole Life Insurance."
Is Life Insurance an Investment? edit
"Life insurance is a lousy investment," the critics charge. "Well, it might be the best investment you'll ever make!" cries the Insurance Agent. "It's not supposed to be an investment....it's about risk protection," insist's another. "Well, I say it's against the rules to sell it as an investment," admonishes the State Insurance Commissioner.
What's the real truth? Should Whole Life be considered an investment? It really depends on the context of the question, and whom you ask. Practically everyone will admit it has an investment component. Certainly the reserves must be prudently invested, so at least your cash values are backed by sound investments.
Here's a quote from an authoritative text: '"Life Insurance Policies are extremely desirable investments when properly chosen to meet the insured's needs. They are poor investments if they result in the purchase of unneeded protection or in the assumption of high premium burdens which prevent other desirable investment."' The text goes on to state "dollars invested in life insurance reserves are very safe investments.....they are highly liquid, since almost the full reserve can be borrowed from the company at reasonable rates, at short notice, repayable whenever the insured chooses; or the policy can be canceled and the reserve recovered."[1]
So, in the broad sense, cash value life insurance is an investment... in the same sense that bank savings and government bonds are also an investment. Personally, I don't like to refer to it in those terms, however. I prefer to think of it as a foundation for prudent investing. Of course, it doesn't belong in the same class as equity investments, such as stocks and real estate. And take this from a life insurance expert: if you get whole life, plan to stick with it because it's a really bad idea if you quit it after a year, or two, or five.
Suppose we put this in street language. There are turtles and there are rabbits. Whole Life is a tortoise, whereas growth stocks are hares. A prudent rule of investing is that we should have an appropriate blend of conservative and more risky investments in a portfolio. To the extent you need to guarantee your principal, you need to go with turtles. Turtles tend to look better in hard times, like we've witnessed at the beginning of the 21st Century. {Milton Jones, CLU, ChFC}
Level Premium System edit
Whole Life insurance operates on the "level premium" system, due to the lifetime nature of the coverage. A rate is established based on the age of the insured at the time of purchase, and generally remains constant (level) until death. The purpose is to make lifetime coverage affordable at older ages. In contrast, yearly renewable term life rates are are very low at younger ages and increase each year with age, becoming prohibitively expensive at older ages. The level premium system results in overpaying for the risk of dying at younger ages, and underpaying in later years toward the end of life expectancy.[2]
Reserves edit
The over-payments inherent in the level premium system mean that expensive old-age costs are prepaid during a person's younger years. Life insurance companies are required by State regulation to set up reserve funds to account for said over-payments, and are classified as Legal Reserve Life Insurance Companies.[3] The Death Benefit promised by the contract are a fixed obligation calculated to be payable at the end of life expectancy, which may be 50 years or more in the future. (see non-forfeiture values)
Cash Values edit
Cash Surrender (and Loan) values arise from the policyholder's rights to quit the contract and reclaim a share of the reserve fund attributable to his policy. When discontinuing a policy, according to Standard Non-forfeiture Law, a policyholder is entitled to receive his share in one of three ways (1) Cash, (2) Reduced Paid-up Insurance, or (3) Extended term insurance.
Example of non-forfeiture values: Whole Life, issued at age 30 with premiums discontinued after 10 years; Premiums paid $12.31 annually per thousand x 10 yrs = $123.10 total; Non-forfeiture values are
- Immediate Cash payment = $98.13 per thousand, or
- Reduced Paid-up Insurance $272 per thousand, or
- Extended term coverage of the full amount for additional 15 years +182 days. Extended term is usually the default option.
Claim Example edit
Hypothetical case: In 1973, Jack and Jill (both age 30) bought Whole Life policies and named each other as beneficiary. The policy(s) were issued in 1973, with the following specifications:
Jack's policy:
- $25,000 Whole Life, participating / dividends applied to paid-up additions
- Riders:
- $25,000 Add'l Accidental Death rider (Jack liked the idea of "double indemnity")
- $50,000 20 year Decreasing Term rider (to cover mortgage and family income needs)
- $1,000 Children's Term Rider (to provide minimal coverage for a child's death)
- Waiver of Premium for Total Disability <ref>Life Insurance/Huebner & Black 9th Ed P148<ref>
$40 monthly premium
Jill's policy:
$10,000 Whole Life (same type as Jack)
- Riders: Waiver of Premium for Total Disability
$13.50 monthly premium
Jack had a disabling stroke at age 50, and died at age 60 from a second stroke. The claim settlement was as follows:
- $25,000 Face amount
- -(7,200) Outstanding Pol Loan Balance (Loan to help with Son's college tuition)
- +15,500 Paid-up dividend additions (policy was participating)
- n/a ......Accidental death (Jack's death was due to natural causes)
- n/a......Decreasing term (term rider had expired at age 50 )
- Dis Waiver of premium (premiums waived since onset of Jack's disability at age 50)
- $33,300 Total Death Benefit paid to Jill
Total premiums paid for 20 years = $9,600 (last 10 years waived)