What does a whole life insurance policy offer?

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Answer 1

<> --Alan B

First of all, any "good financial advisor" who makes a blanket statement that no one with a "true need" for life insurance should ever buy whole life is not a good financial advisor. The same can be said regarding ANY financial product. Every product, and every variation of it, is the best solution for a particular situation.

There is a myriad of reasons to buy life insurance, and many of those reasons necessitate Permanent coverage, such as whole life. Even when there is not a specific need for permanent coverage, it may be cheaper in the long run. Participating (dividend-paying) policies will typically be capable of paying their own premiums after about 12-15 years (of course, dividends are not guaranteed, but most household name companies, and many you've never heard of, have been paying them consistently each year for over a century). In many cases, the total lifetime premium outlay is comparable or even less than a 20-30 year term policy; and the policy will still be in force when the insured dies, unlike a term policy, which will likely lapse or expire before a claim takes place.

Now, to address the "insurance is not a good investment" argument. First of all, whole life is not sold as an investment vehicle. However, when cash values are guaranteed at around 3-4%, and typically earn about 6-7%, with no risk to principle, it could be argued that whole life is perhaps a very suitable substitute for the bond portion of one's portfolio.

Bottom line: Most people do have a need for some amount of permanent coverage, and the need and the amount are best determined with a qualified financial advisor or planner.

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Answer 2

There is an old saying in the industry, people "buy" term life, they are "sold" whole life. The sales pitch is that whole life offers an "investment" beyond the underlying policy. What the insurance company does not say is that in order to pay you a return, it invests your money in stocks and real estate and makes enough to pay you AND create a profit. Obviously, you are better off investing that money yourself and keeping all the profit, not just the small amount the company gives you.
Any good financial adviser will tell you that if you TRULY need life insurance--that is you have children or dependents incapable of supporting themselves--then you should buy a Term Life policy, which is much cheaper than whole life, and you should cancel that policy the minute those dependents CAN support themselves and invest what you were spending on premiums.

Answer 3

The basic difference between term and whole life insurance is this: A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against. The three most common types of whole life insurance are traditional whole life policies, universal and variable. With both whole life and term, you can lock in the same monthly payment over the life of the policy.

Forced Savings
Whole life insurance is expensive: You're paying not only for insurance but also for the investment portion. That extra cost might almost be worth it if these policies were a good investment vehicle. But usually they aren't. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement."

Leaving aside the fact that there are many better ways to save for retirement, these policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return. On top of that, there are up-front (but hidden) commissions that are typically 100% of your first year's premium. Worse, it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment.

Premiums for term insurance are downright cheap for people in good health up to about age 50. After that age, premiums start to get progressively more expensive. The same holds true for whole life policies, though people who need coverage starting in their 60s and beyond may have no alternative but to buy whole life. Most companies simply won't sell term policies to people over about age 65.
Sizing Up a Whole Life Policy
One of the great problems with whole life is only an expert can tell if a policy you own or are considering will ever become a decent investment. James Hunt, actuary for the Consumer Federation of America, who has analyzed thousands of policies, notes that whole life policies hardly ever yield a reasonable return unless held for 20 years or more. So if you buy one be prepared to pay into it for the very long haul.

The key to a whole life policy is its internal rate of return -- the yield on the policy after all fees and charges are subtracted. A competent analysis can determine at a minimum whether the weight of the fees and charges built into one of these policies will ever allow a worthwhile return. Such an analysis will also pinpoint the minimum amount of cash value that you can derive from a policy at any given time interval.

Some financial planners, actuaries and accountants can perform internal rate of return analysis on your policy. The Consumer Federation has a service that will do this, calculating the real return year by year and comparing it with other investments. The fee is $50 for the first policy, $35 for each additional. Call 603-224-2805 for more information.

Answer 4

Protection against Death/TPD and/or Critical Illnesses.
Savings value if you decide to terminate the policy at a later stage.
You can also add riders to a main policy like Accident and Hospitalisation.

Answer 5

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