Times have changed. The way many Americans view their finances today has shifted dramatically over the past few years. Today, individuals are looking to take less financial risk than ever before. Consequently, a growing number of consumers are rediscovering a financial product that has been available for years--- Whole Life insurance.
The main purpose of Whole Life insurance is to provide valuable guaranteed financial protection whenever the insured should die. But what many do not realize is that it’s so much more. Whole Life provides a wide array of financial benefits, including “living benefits” --- a term that refers to the fact that a Whole Life policy provides a ready source of funds for any purpose throughout the policyowner’s lifetime or during key income-producing years.
For many years, some financial experts have attempted to discredit Whole Life insurance--- while promoting the supposed benefits of other insurance policies that, in certain market environments seemed to offer higher returns at lower costs.
But what we’ve learned in recent years is that some policies ultimately required some policyowners to pay additional premiums in order to keep their policy in force.
Life insurance is an intangible. It’s not like a car or an item of clothing. While life insurance can provide a good deal of protection and long-term financial secclie policy beneficiaries, the intangible nature of this product leads many life insurance consumers to pursue what they feel is a “better deal” when considering their lifelong insurance needs. But it’s important for those same individuals to understand these “truths” with respect to their pursuit of a better deal.
Truth #1 Life insurance policy illustrations—especially many UL and VUL policies—portray an attractively impossible outcome
Policy illustrations often quote a low price (planned premium) that often can’t be sustained over the life of the policy
Illustrations of non-guaranteed policies can conceal the likelihood that the illustrated planned premium will turn out to be insufficient when:
- calculated with current expenses and returns projected decades into the future
- the insurer has the right to increase its internal pricing structure; and
- the interest or investment return factors are assumed to remain the same (which, in reality, they never do).
Even the disclaimer required by insurance regulators on every policy illustration warns of the limited usefulness of the illustration data: “illustration [results] are neither a projection nor a guarantee of future results.”
The way to better portray a probable outcome is to use a policy that is guaranteed. Whole Life has valuable guarantees built in. These guaranteed rates and values can help create a more consistent and reliable projection than a policy without guarantees. And these guarantees provide balance to other (non-insurance) portions of your portfolio in which you are taking risk.
Truth #2 We can’t reasonably answer the question: “Which policy will perform better?”
- If there is one thing that we know about the economy, it’s that it is always changing. That has created some major repercussions over the years for life insurance policyowners who own policies that didn’t have guaranteed premiums.
- Illustrations calculating “premiums” for universal life in 1982 with 14 percent crediting rates created an unrealizable long-term expectation that couldn’t be supported as interest rates plunged in today’s low levels. As a result, most policies issued in the early 1980s that are still in force are paying only the rate guaranteed in the policy (which is invariably higher that the rate used for policies issued today).
- Illustrations calculating variable universal life premiums in 1997 with the regulated maximum illustration rate of 12 percent also created an unrealizable expectation as investment returns plunged in early 2000 and again in 2008-2009. These changing conditions required the policyowner to pay additional premiums—sometimes at much higher levels than those originally illustrated—in order to avoid having the policy lapse during the insured’s lifetime.
- Although historical performance can’t be used to predict the future, it can give you some important insights into what type of unpredictable volatility you can expect with policies that don’t have guaranteed premiums. If volatility is a problem—consider Whole Life.
Truth #3 There’s a cliché that says, “If it’s too good to be true, it probably is.”
- Potential buyers often focus too much on the “attractive impossibility” presented by the illustration—without understanding what is required in order to keep an insurance policy in force over the insured’s lifetime.
- In truth, the focus should be on the agent and insurance company—not the product. A worthwhile relationship between a financial services company and an agent starts with your goals and objectives, moves on to your available cash flow or assets, and presents suitable products from financially strong companies that relate to your own situation in a prudent and realistic way.
- It’s important for consumers to be careful of how and what they are being sold. Because the right life insurance is meant to last a lifetime.
Truth #4 Start with an asset allocation instead of a set interest rate.
- Interest rates in the U.S. have risen and fallen frequently over the last 40 years—and will continue to do so in the future.
- Investment returns have been very volatile in the last 20 years and are likely to remain so. Because lower returns can cause a policy’s cost of insurance to increase, the effect of interest rate and investment return volatility cannot be overlooked.
- For example, the 40-year compound return on investments in the period from 1/1/1968 to 12/31/2007 yielded a return 200 basis points (2.00%) higher than investing in the period one year later from 1/1/1969 to 12/31/2008!
- Many times a client’s asset allocation for investments is similar to their allocation for their life insurance, although many prefer a more conservative approach for their insurance.
- Guarantees found in Whole Life insurance create a conservative asset that is similar to other fixed income assets in a portfolio.
Truth #5 Everyone loves a good deal—that’s human nature.
- But: There is no free lunch. The sweet taste of an apparent bargain pales in comparison to the bitter experience of bad quality. Think how many times you thought you got a bargain, but got a dog instead.
- Most of us have bought enough items that seemed like a “good deal”—but turned out to be something entirely different in the end.
- There are things that can—and should—be pursued on the basis of lowest price. But life insurance isn’t one of them, since the longevity of the policy is put at risk if the premiums paid are insufficient to sustain the policy over the long term.
- The good news, when talking about most permanent life insurance, is that the full premium is not a sunk cost—you get value back today and tomorrow.
- While you should address price with your insurance professional for your individual situation, be sure to also focus on value. There is value in putting more money into a tax-advantaged vehicle like life insurance. In addition to the potential tax savings, it can also lead to higher cash values and longer guaranteed coverage within your policy—giving your life insurance strategy the potential for a higher rate of success.
These truths about life insurance may seem to be obvious. But it is human nature to have conflicted feelings about those things we would prefer not to face or act upon. No one likes to consider the possibility of their dying—and of course, there’s no requirement that people own life insurance. Most buy it because they “love someone” or “owe someone.”
Understanding the truths we’ve explored here can help you assess your needs and make more objective and informed decisions about the life insurance you purchase—for the long-term protection of your loved ones.
Still Financial, LLC, its agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.