Having worked in the life insurance industry my entire career, I was approached by hundreds of clients. Whenever they would approach me for tips on whole life insurance, I’d pose the question, “What do you already know about life insurance?”
Based on their response, I was able to know exactly how much research they’d done and whether or not they were ready to purchase a policy. Most people know they need life insurance to protect their loved ones, should anything happen to them, but for many people life insurance can be confusing and even a little overwhelming.
What I found interesting is that every client seemed to have one common denominator — they remembered what type of life insurance policy their parents, and even in some cases, their grandparents had. In most cases, it was a whole life insurance policy. Whole life insurance is a common type that many people feel at least a little familiar with.
So, if you’re in the market for life insurance, let me share a few insider tips on whole life insurance that you need to know to better prepare for your search.
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Whole Life Insurance is Important, Just Ask the Gerber Baby
If you’re of a certain age and you hear the term whole life insurance, I’ll bet your first thought is of that adorable Gerber baby. I’m telling you, that baby has not only sold enormous amounts of pureed carrots, but also a LOT of whole life insurance.
For those of you who may not be familiar with Gerber, the company has been around since 1927. They started as a baby food and clothing company, but in the mid-1960s, they branched out to include a life insurance subsidiary. The marketing behind the plan is really genius — what parent (or grandparent) could look at that adorable baby’s face and NOT want to purchase a safety net for their own adorable baby?
The Gerber Grow-Up Plan is still offered and is considered one of the top life insurance plans for children. Many parents purchase these plans for pennies when their little one is an infant, hoping that it will be a sound investment into their future.
What’s so interesting about these policies is that many people hold on to them into adulthood. I’ve worked with clients who still had their Gerber policy thanks to their parents’ purchase at birth. In fact, it’s often the first association people make when I mention whole life insurance.
Whole life insurance is the oldest form of permanent life insurance available. Now, what does that mean? A permanent insurance policy means as long as you continue paying the premiums, you’ll hold the policy for your WHOLE life.
When whole life insurance policies were initially introduced, they were offered as investments. Whole life insurance policies were eligible to earn dividends (otherwise known as a “participating” policy). A participating policy pays dividends to you, as the policyholder. Remember that a dividend is nothing more than a portion of earnings that a corporation distributes to its policyholders — dividends are the profits generated by the insurance carrier.
These dividends are paid out annually — each year over the life of the policy. Many mutual companies offer participating whole life insurance policies today, making them an insurance option with benefits.
“If I die, why do I need money?” You don’t, but your family, your business or your favorite charity might. – Life Insurance
Tips on Whole Life Insurance and Making the Most of Dividends
So, how do you make the most of these whole life insurance dividends? When your insurance pays out on a yearly basis, will you get rich?
Okay, no, the dividends usually aren’t going to be a giant bonus you can take to the bank, but by following a few insider tips on whole life insurance, you’ll be able to use the dividends to your benefit in several ways.
Reduce Future Payments
One savvy way to use the dividends is to reduce your future premium payments. This option can be a good choice if you’d like to cut back on your future expenses.
Use Them Toward More Coverage
Dividends can also be used towards the purchase of “buying-up” additional life insurance coverage. Using the dividends this way is smart because your life insurance needs typically grow over the years.
Let the Dividends Increase Your Policy Value
The easiest way to use the dividends is to simply do nothing. If you don’t know what you should do or what you want to do with the dividends, you can let them increase the value of your policy.
The final option is nice if you like the idea of getting a little something back from your life insurance. Since you’ve been paying into the policy for so long, you can use the dividends as a means for obtaining some cash.
Whole life insurance policies really do offer several great benefits.
The Slow and Steady Life Insurance Policy
If you thrive on consistency and aren’t a fan of surprises, a whole life insurance policy may be ideal for you. Whole life policies have a lot of guaranteed features and consistencies.
- You have a level premium that will never increase during your lifetime.
- A guaranteed death benefit that will never decrease during your lifetime.
- A policy that accumulates tax-deferred cash value.
When comparing features of a whole life insurance policy, the most important features is the guaranteed death benefit. Whole life insurance is specifically geared toward someone whose primary concern is a permanent death benefit guarantee. Cash value is another important aspect of these policies.
Basically, if you’re a slow and steady investor who just wants a policy that will pay out a little to your loved ones in the event of your death, whole life insurance is an easy life insurance option.
It’s not often you’ll find a whole life insurance policy with a substantial death benefit. Most policies have smaller face amounts — these policies aren’t meant to supplement a spouse’s income or act as a trust fund for your children. These types of policies are typically used to cover final expenses — the cost of your funeral or burial and smaller outstanding bills.
“A man who dies without adequate life insurance should have to come back and see the mess he created.” – Will Rogers
What About the Premiums? Riders? Benefits?
Let’s get “real” for a minute about the premiums for whole life insurance policies. They aren’t cheap. In fact, this is one of the most expensive life insurance products you can purchase. Remember that the premiums for a whole life policy support both the death benefit guarantee and the cash accumulation within the policy. So, prepare yourself in advance for sticker shock when you’re shopping for life insurance.
But wait, there’s more! I know, I know…there’s always more. Whole life insurance policies also have the option for “riders.” These are additional features you can purchase for the policy. Should you choose to add riders, your premiums will increase substantially. That said, there are some riders that are well worth the investment.
Riders for whole life insurance policies will range from carrier to carrier as well as from state to state.
Here are several common insurance riders listed in alphabetic order:
- Accelerated Death Benefit
- Accidental Death Benefit
- Aviation Exclusion
- Child Term Rider
- Disability Waiver of Premium
- Travel Accident Benefit
When you shop for whole life insurance, you’ll hear many of the riders above offered. Along with those riders, you may hear other life insurance terminology like grace period, free look period, non-forfeiture options, policy reinstatement, and temporary coverage. Do a little homework before you shop, so you feel confident understanding exactly what you’re looking for. I have several resources in our free resource library that will help you navigate.
Now, another tip on whole life insurance is that you can invest your cash accumulation (your dividends) wisely. Your policies’ cash accumulation will increase with each premium you pay. What do you do with that cash?
Since we know the death benefit of a life insurance policy is for the benefit of our loved ones left behind, what happens to the cash accumulation that’s left on your policy? Well, it continues to accumulate. If you want to access the cash, you can take out a policy loan and borrow the money against the policy. I know it sounds strange to “borrow” your own money, but here is how it works:
If you take out a loan on your existing life insurance policy, that policy remains intact. Any future premium payments that you make toward the policy are applied to the outstanding loan (be sure to check with your life carrier to confirm that’s how they’re applied), lowering it. So, you’re paying yourself back. It’s similar to taking a loan out of your 401(k) with your employer.
Some life insurance policies allow you to take a maximum loan of 100% of the “guaranteed cash value.” It’s important to realize that for any outstanding loan, plus interest charged and unpaid before your death, the amount is deducted from the death benefit to your beneficiaries.
There are very few policies where the interest rate you’re charged, and the interest rate credited back to you zeroes out (meaning, making it a zero-net-cost-loan to you). Those types of policies are few and far between.
If you’re considering life insurance, a simple whole life insurance policy is a great place to start. Remember that nothing in life is guaranteed, except death and taxes. When you purchase a policy from a mutual (whole life insurance carrier) company, you’re most likely expecting some dividends in the future. But remember, although dividends are expected, they’re never guaranteed.
Ultimately, life insurance is for your peace of mind. It helps your loved ones deal with your final expenses and cover the costs of saying goodbye. It’s a gift you can give to those who you leave behind.
“Perhaps the best cure for the fear of death is to reflect that life has a beginning as well as an end.” – William Hazlitt 1778 – 1830, English writer
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