First of all, what is whole life insurance?
Whole life insurance is a type of life insurance where the death benefit is essentially a permanent obligation of the insurance company. Whole life insurance typically has certain guarantees made by the carrier —
✓ the death benefit is guaranteed
✓ the premium is guaranteed to not increase
✓ cash-value available while the insured is alive
What are some unique features of whole life insurance?
Insurance companies may have other features and benefits which may or may not be guaranteed, which are a part of their particular whole life product. These could include various riders, such as —
- waiving the premium if the insured becomes disabled
- advancing a portion of the death benefit if the insured meets a certain definition of incapacity or terminal illness
- adding extra premium to grow the death benefit and cash-value, exchanging insureds
- additional policy purchase guarantees, and additional growth of the policy through dividends which the company may have the discretion to pay out.
Decades ago, and still today with some companies and certain products, whole life insurance (also known as “ordinary life”) was the only type of life insurance coverage available. Essentially, a person paid premiums, and should they pass away before the actuarial table said they statistically should, the company would pay out some multiple of what they had received in premium payments. If the person lived to about life expectancy or longer, the company’s payout might roughly equal or be more than the total premiums ever paid. As actuarial science and statistical modeling advanced, companies could make better predictions about an individual’s statistical life expectancy and design whole life products that could grow in death benefit, cash-value, or both, over time.
What is cash-value growth in whole life insurance?
Certain whole life policies from certain companies can provide cash-value growth over time, in a tax advantaged environment. With these types of policies, aside from having the insurance protections, what a policyholder is essentially doing when they have a whole life insurance policy, is leveraging the general account of the company, and if it is a participating policy, the profitability of the insurance company for growth of the policy.
So what does this mean? In general, it means that a good whole life insurance policy from a company with a reliable dividend history and a good rating of their general account holdings, can provide a relatively safe and fairly reliable growth of cash, and with a properly managed policy, in a tax deferred manner, with tax-free use of much of that cash, while having life insurance and potentially other protections at the same time. The tax advantages of a whole life policy can mimic the tax advantages of a ROTH IRA, but without all of the restrictions imposed such as income ceilings, an earned income requirement, and contribution limits.
How do I get a comparison of different whole life insurance carriers?
Lastly, your independent agent should be able to produce and review a VitalSignsⓇ comparison of the carriers he or she is recommending to you. In the hands of an experienced agent, the reports on the various carriers can help guide your decision to a company you think is most suitable for your goals.
Especially with long term goals, there are a multitude of important factors when deciding on which carrier and product to use, so decisions may be around the product, others may be around the company. This is where an experienced independent agent can be a tremendous resource to you with regard to valuable information that may save you time and regret in the future.