By Moshe Alpert
There are two types of life insurance: Term Insurance and Permanent Insurance. The fundamental difference lies in the name. Term insurance lasts for a specific term in the insured’s life, and permanent insurance lasts for the entire duration of the insured’s life (provided that premiums are paid).
However, I have observed a significant amount of confusion regarding permanent insurance. The proverbial monkey wrench is the portion of the policy termed as “cash value.” Simply put, a component of permanent life insurance builds cash value from which the owner can draw funds through loans or surrendering of insurance (note that here the owner has access to the cash value, not the insured. The two parties are not always one and the same. For example, many parents write permanent life insurance on their children for its long-term benefits. In this scenario, the child is the insured, but the parents are the owners). Of course, the question arises as to why and for what purpose does this symbiosis exist?
Whole life insurance can be a key element in financial planning. Aside from its guaranteed death benefit, the consistency and guaranteed cash value growth it provides are essential elements to a financial plan. Though policies vary, premiums typically can be arranged to be paid in different schedules, such as 10, 15, and 20 years, or until a given age such as 65 and 90. The cash value grows and compounds without incurring current income taxes on that growth as long as it stays in the policy. In addition, some permanent life insurance policies are eligible to earn dividends, which can help your death benefit grow and your cash value grow and compound even faster. Dividends can result when a company’s actual experience (e.g. mortality, expenses, and investment returns) is better than what was assumed in setting the policy’s premiums and guaranteed values.
Another important thing to keep in mind: When presented with an illustration for a whole life policy, one must observe the guaranteed death benefit and cash value and non-guaranteed death benefit and cash value. As noted in the fine print, illustrated growth is not guaranteed. This is of so much importance since whole life insurance is a long-term asset that one hopes to keep for many years.
Whole Life Insurance in the Context of a Financial Plan
All this being said, one must keep in mind that whole life insurance is a life insurance policy. Whole life insurance can be a dual-purpose asset that provides flexibility to a financial plan. This takes form in a guaranteed death benefit (for death-related expenses) and guaranteed cash values (for potential living benefits). It does not substitute holding other assets for wealth management. The consumer must be careful not to be fooled into thinking that whole life insurance is a fitting substitute for other wealth accumulation assets. Nevertheless, it is an important and essential thing to have for most people.
This article is a brief synopsis of whole life insurance. As was stressed in the previous article, only a competent financial adviser can adequately assess the correct and most suitable plan for a client.
Moshe Nison L. Alpert is an insurance agent of the Northwestern Mutual Life Insurance Company. His office is now recruiting potential interns and full time advisers. To inquire, e-mail firstname.lastname@example.org.