You’re smart, and don’t like to pay for something you don’t benefit from. So why purchase a life insurance policy that will cost you more than the cheap term policies you see advertised all over?
In most cases, there is very good reason to do so. With many of the higher-cost policies, you can enjoy much of the benefits now rather than later. Life insurance options pertain to a whole range of products beyond just legacy planning, ones that suit the contemporary lifestyle. They can be used as a de facto investment account to send children to college, marry them off or just be there for a rainy day.
Welcome to the world of “whole life insurance” policies. These policies combine the traditional death benefit with a “cash value” that constantly grows. Any amount within a policy’s cash value can be withdrawn at any point in your life as a loan, though there may be a minimal percentage of interest charged, and a lower amount earned, on the loan amount until it’s repaid. Even if you never borrow any of the funds, the policy’s death benefit increases along with the cash value, so your dependents benefit nonetheless.
How worthwhile is whole life insurance as an investment vehicle?
That’s a very good question, one that weighs heavily on the mind of the consumer. It is indeed easy to fall for plans with investments benefits that are a lot lower than what they could be. It is crucial to be informed.
Whole life insurance can cost typically 10 times more than term life insurance. Term life offers benefits only and locked-in premiums for a particular term. You do not benefit a penny if no benefits could be claimed before your policy term concludes. On the other hand, whole life insurance has locked-in premium for life, and the money you pay towards the policy is guaranteed to always be there for you. The cash value portion can either be enjoyed now, or it will be there for dependents as an increased death benefit. You never “waste” any money.
A more confusing—but no less important—aspect is the interest you earn. With whole life insurance, both the death benefit and cash value continuously grow. Actual numbers vary, but, for arguments sake, let’s use eight percent as the average compounding annual growth rate for whole policies.
That’s a pretty respectable earning and far superior to stocks or another investment with a similar return, for several reasons: You are guaranteed to never lose the principal, and you’re guaranteed a minimal profit of 2% or so a year, compounding. All benefits, whether enjoyed during your lifetime or posthumously, are 100 percent tax free. Perhaps most of all, purchasing a whole life policy effectively forces you to accumulate a respectable amount of savings and profit over the years, as opposed to traditional investment funds that often get lost to your latest expense. (In the event that you no longer pay such a high premium down the line, the policy can be tweaked to reduce the premium without losing what you earned thus far.)
But there is one major detail that most people are unaware of. The interest you really earn is not based on your full premium. It is eight percent of the portion of your premium that goes to the policy’s cash value. The portion that goes to the death benefit, which is particularly high in the early years of the policy, does not earn any profit. So when looking at the full picture, you can be actually earning as little as 2 percent profit off your premiums for many years. In this case, you can be more legitimately tempted to enroll in a cheap term policy, and use your premium savings on a non-life insurance investment product.
What’s the solution? How can you enjoy the best of both worlds?
You can purchase a hybrid whole life policy where the death benefit is a term policy benefit, which is much cheaper, and the rest goes for the cash value. With these policies, you actually can earn closer to eight percent on the full premium amount. Insurance Companies don’t promote these policies because they are not as profitable. However, an honest professional broker with access to the full range of quality insurers and policies should present you with these options. Of course, Cosmo specializes in this. We offer you all quality options, with a commitment to honestly assess what the best options are for you.
Other Life Insurance Options
Now, though a well-designed whole life policy is a great option for virtually all people, there are exceptions. Obviously if one cannot afford a whole policy, they would be wise to invest in a less expensive term policy to provide security for their family. Also, once you reach middle age and up, it typically makes a lot less sense to invest in a whole life policy because it takes quite a few years until a respectable profit builds up. The younger you start, the lower your premiums will be and the more you’ll earn.
Another major demographic is the super-wealthy who are engaged in estate planning to minimize the impact that the estate tax will have on their heirs. In order to offset the tax losses, lawyers and financial planners will often advise them to invest in a life insurance policy, which benefits the heirs tax free. In this case—when you’re objective isn’t savings or modest profit—it makes most financial sense to invest in a death benefit only, all the more so once the insured is no longer young.
It is important to bear in mind, however, that there is another option for death-benefit-only policies, other than term. Term policies’ most significant drawback is that they are only in effect for a term of 10, 20 or 30 years—and worthless thereafter. Universal life insurance, a.k.a. “permanent term” policies, are locked in for a much longer period, well past one’s life expectancy. These understandably cost more per month than a traditional term policy—for which most people never claim benefits—but is still significantly cheaper than a whole life policy with a similar death benefit.
Which option is best for you? Let’s have a talk!
For more information or for a free, no-obligation quote, please call 201-817-1388 or email [email protected]
By Mark Herschlag
Mark Herschlag is the founder and CEO of Cosmo Insurance Agency, which is based in Ocean County. Cosmo Insurance Agency offers personalized solutions for individuals and businesses looking to obtain health, life, dental, long term care or disability insurance.