By Vince Davis, State Farm Insurance, Vince Davis Insurance Inc.
Guest Column
Over the last four decades I have probably written thousands of life insurance contracts. The most important insurance contract is the one that is in effect when you die. It does not matter what kind it is. There is one policy that matters. That is the policy that is in effect when you pass away.
If there is enough coverage to take care of your family’s financial needs or at a minimum enough coverage to take care of your final expenses, then that policy is a good policy.
All life insurance policies are not created equally. Whole life insurance seems to have passed the test of time. Here is some information that I have learned:
Whole Life Insurance Policies
Until recently, whole life was the only available permanent life insurance policy. Unlike term policies, which last only throughout the term, permanent policies are designed to last the entirety of an insured’s life.
So long as premiums are paid as agreed, permanent policies such as whole life life insurance provide lifetime protection.
- Premiums may be paid in cash throughout the life of the policy.
- Premiums may be paid from investment returns in the cash value that has accrued in the policy. Additional provisions of whole life insurance include:
- Whole life insurance premiums are typically level throughout the term of the policy.
- All whole life policies pre-fund future higher mortality costs using present value analysis. Or In other words, whole life insurance is relatively expensive when the policy is originated. But, over longer and longer periods of time, coverage becomes relatively inexpensive (especially compared to a new term policy).
Policies with so-called vanishing premiums ultimately pay the entirety of the premium with accrued cash value; the insured is no longer required to pay premiums out-of-pocket.
Death Benefit
- The death benefit remains level while the policy is in force.
- If the insured dies at any time the policy is in force, the beneficiary or beneficiaries receive the policy death benefit (also called the policy face value).
Cash Value
- When premiums are paid, they are partly used to pay for the policy’s death benefit and partly accrued as cash value in the policy.
- Cash value increases to the face value of the policy at age 100 (or 120)
- At age 100 (or 120), the insured can receive the cash value of the policy, which is equal to the face value of the policy.
- Cash values may be used for loans or may be received if the policy is surrendered.
- If the policy is surrendered, then the insured receives the cash surrender value. The cash surrender value is the cash value less cash surrender charges.
- Cash values usually have a minimum guaranteed rate of interest.
- Whole life policies may be participating (receive dividends from the insurer) or non-participating (do not receive dividends from the insurer). Appropriate Use
- Anyone with permanent life insurance needs
- Estate planning purposes o To provide liquidity at death to pay taxes, provide income during the grieving process or pay off debts.
- Given its high cost, when it is appropriate to recommend whole life insurance? 1. For anyone with permanent life insurance needs, such as clients: 2. With permanently disabled dependents o Who intend to leave a large charitable bequest 3. With certain estate planning needs, such as the need to provide liquidity at death to pay taxes or debts.
Advantages and Disadvantages of Whole Life Insurance
- A whole life insurance policy has many advantages, including a tax-deferred growth of cash value (the earnings portion on the cash value is not tax-deferred) and permanent protection until age 100.
- However, whole life insurance policies are expensive and have inflexible, high premiums. In addition, they offer only a gradual cash value growth and the insured may not be able to purchase as much protection.
Types of Whole Life Policies With a first-to-die policy, death benefits are paid when the first insured dies. These policies provide for the surviving spouse. First-to-die life expectancy is less than either single life expectancy, making these policies relatively expensive (but more likely to pay out).
With a second-or-last to die policy, death benefits are paid when the second-or-last insured dies. These policies provide for estate liquidity or for surviving children or other beneficiaries. Second-to-die life expectancy is more than either single life expectancy, making these policies relatively inexpensive (but less likely to pay out).
Ordinary Whole Life The traditional whole life policy is called ordinary life. Insureds pay a level premium until age 100 or death.
- At death, the insured’s beneficiaries will receive a death benefit equal to the face value of the policy.
- At age 100, the cash value of the policy has reached its face value Limited Pay Whole Life With limited pay policies, premiums are higher than with ordinary life. These higher premiums pre-fund the policy even more than normal, which allows the insured to only pay premiums for a specified number of years or until a specific age.
Variable Whole Life With most whole life policies, cash value is left in a cash-equivalent account. With variable life policies, cash value is invested in stocks, bonds, and money market mutual funds.
- These riskier investments allow insureds an opportunity for higher returns on cash value.
- With variable life policies, the death benefit and cash value fluctuate based on investment performance. 1. After an above-average year, the death benefit and cash life increase. 2. After a below-average year, they will decrease.
- Dividend Options
- As the cash value in whole life policies accumulates dividends, the insured may elect to receive those dividends in the form of:
Surrender Charges and Nonforfeiture Options In some cases, insureds no longer need or can afford permanent life insurance. Insureds may surrender a policy, but in doing so may incur surrender charges. And in the case of surrender, insureds may need to select among a variety of nonforfeiture options. Surrender Charges
- The insurer incurs several costs when issuing a whole life insurance policy that often exceeds the first premium payment made by the insured.
- To prevent incurring losses when policy owners purchase and then quickly cancel their insurance contracts, insurance companies typically enforce a surrender charge that is designed to compensate them for the up-front costs they incur when issuing the policy.
Whole Life When an insured surrenders a policy that has already accrued cash value, they may have certain nonforfeiture options available.
- Cash Surrender Value o Insured receives the accumulated cash value when terminating the life insurance policy. o Surrender charges may be imposed.
- Reduced Paid-up Insurance o Receives the cash value in the form of a paid-up policy with a smaller face amount.
- Extended Term Insurance o Receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.
Insurance Nonforfeiture Values When an insured surrenders a policy that has already accrued cash value, they may have certain nonforfeiture options available.
- Cash Surrender Value 1. Insured receives the accumulated cash value when terminating the life insurance policy. 2. Surrender charges may be imposed.
- Reduced Paid-up Insurance 1. Receives the cash value in the form of a paid-up policy with a smaller face amount.
- Extended Term Insurance 1. Receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy. Vince Davis Insurance Inc.
State Farm Insurance 3344 Secor Rd. Suite A102 Toledo Ohio 43606, vince.davis.bun1@state farm.com, 419-244-2904, 419-509-0326 cell. Vince Davis BA Rutgers University, MBA The University of Toledo, Bronze Tablet, Silver Scroll, Crystal Excellence, Ambassador Travel 4/2023