Whole life insurance quotes used to be the bread and butter of independent agents. Once consumers got more educated about term life insurance, plenty of insured jumped ship but some did not. What are three common problems with whole life policies you should know about?
What is Whole Life insurance?
When compared to term life insurance, whole life policies offer a basic death benefit as well as a cash value savings feature. Each policy payment is split and funds are diverted to the death benefit payment and the savings account payment. Whole life insurance quotes used to highlight that this mandatory savings component came in handy if — somewhere down the line — the consumer is short on cash and needs to make a withdrawal or loan. It was also sold as a retirement savings benefit.
Problem 1: Expensive Savings
Although an admirable goal, the way to achieving the savings promised demands a decrease of the available death benefit. Not surprisingly, it is a lot cheaper to buy a high-dollar term life insurance policy than a whole life policy with a comparable death benefit. The consumer must carefully ponder whether the whole life insurance policy protects the beneficiaries’ fiscal well-being at the current time. Since this type of insurance is a bit of a gamble that death is unlikely to occur, it is tempting to look toward the future — when the savings have accumulated — rather than to the present and to the needs of those the insured would leave behind.
Problem 2: Who Needs a Whole Life Policy?
Although term life insurance rates are lower, these policies are frequently not renewable after a certain age (usually age 75 or above). Agents have used this restriction as a great selling point for whole life insurance policies that, after all, remain in effect well past these limitations. That said, the consumer should seriously consider whether she needs a life insurance policy at the time that the restriction kicks in.
Long term care insurance and a burial prepayment plan might make more sense at that time. The beneficiaries — who relied on the insured’s financial contributions during her working life — will most likely be gainfully employed when the policy holder reaches the term life ceiling. It stands to reason that — except in extraordinary circumstances — a senior citizen would not truly need to have life insurance.
Problem 3: Volatile Returns
Motley Fool investment advisers warn against the Siren’s song of universal whole life insurance. In theory, the low return on investment rates that policy writers can offer to consumers make whole life insurance an inefficient savings vehicle. The real winner is the insurer, which puts the consumer’s money to work and returns only meager dividends to the policy holder. The universal policy offered a quasi-revenue sharing opportunity in times when the insurer’s investments were more profitable than expected.
Couple this with the promise of lowered monthly premiums during the ‘fat years,’ and it is clear how the policy buyer may form an overly rosy picture of insurance costs and future savings. In this instance the simple predictability of basic term life insurance rates makes budgeting a lot easier in the long run. It also frees up money to be invested separately for retirement or rainy day savings, which may increase the return on investment.
