17 September 2012 0 Comments

Understanding Life Insurance Policies — “WHOLE LIFE”

This could be a real snooze-fest if I go into too much detail, so let me simply state that Participating Whole Life Insurance is a contract whose premiums are vastly overstated in the early years in the hope that dividends will ultimately produce a very competitively priced contract.  Can it work?  Only if you stay at it for a very long period of time…and then it’s questionable.

Today’s low interest environment is the culprit.  Policy dividends depend on three elements:

1.  Actual mortality experience that is better than the Standard Mortality Tables.

2.  Expense of operations that is lower than projected.

3.  Return on investments that are better than the policy guarantee.

The first item can be accomplished by careful selection of risks.  The second item might be improved upon slightly by stringent cost controls.  However, expecting returns from current investments that exceed the policy guarantee is very iffy.  The stock market might be doing well, but life insurance companies don’t invest much in equities.  In fact, the 100 largest life insurance companies in the United States have only an average of 4.2% of their assets invested in stocks and 86.9% in debt instruments such as bonds, mortgages and policy loans.  (Real estate, cash and short term and other investments make up the balance).  Life Insurance companies can do better than you and I on interest returns, but don’t expect dividends on Participating Whole Life Policies to perform as they have over the past 25 years.

Several years ago many insurance companies faced with the challenge of competing with lower Universal Life premiums introduced a “blended” policy.  It was a hybrid of Participating Whole Life with a Term rider.  I do not like these policies.  The term charges are based on assumptions not guarantees.  Couple this with the lousy interest being earned and if you want a lower premium with cost and death benefits that are guaranteed, go with a Universal Life contract that provides guarantees.   And, buy it soon, because long range guarantees on UL policies are disappearing.

If you purchased a Participating Whole Life many years ago, don’t expect future dividends to equal what was projected, but don’t immediately run out and replace it.  These older policies are still benefiting from older investments that are producing higher interest yields.  If you’re having trouble paying the premiums, ask your agent what options are available using cash from previous dividends and changing future dividend options.  If you must discontinue the premium, check out your non-forfeiture options which include taking a reduced paid up policy or a continuation of the full death benefit for a designated period of time (extended term).  Depending on your current health and future needs, these might make sense.

“Understanding Life Insurance Policies—Universal Life” will be coming up next.

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