Whole life insurance can be a valuable part of an estate plan, but like many things in life, it’s not appropriate for everyone. These tips will help evaluate the pros and cons of whole life.
A whole life insurance policy includes a savings account, known as its cash value, which builds over time. For some people, being able to borrow against the cash value or even surrendering the policy for the cash is a useful feature. Still, term life insurance, which covers only a certain amount of time, is far less expensive. Which one is a better fit for you?
Huffington Post’s article, “5 Questions to Ask Before You Buy a Whole Life Policy,” clarifies the key factors that should go into this important decision.
- Do I really need it? Whole life can be helpful, but it’s not necessary for everyone. If you require just some temporary coverage until you’ve paid off debts or your kids get through college, choose term life insurance. It’s inexpensive if you’re young and healthy. However, whole life can be a good if you:
- Have a big estate that’ll be subject to taxes when you die;
- Want to provide money to heirs for a funeral and final expenses or leave a legacy, even if you spend all of your retirement funds;
- Are the parent of a lifelong dependent, such a child with special needs—a life insurance payout can fund a special needs trust; or
- Maxed out contributions to tax-advantaged retirement savings accounts and want a safe place to grow cash long-term as part of your diversified portfolio.
- Can I afford it? Whole life costs a lot more than term life because some of the premium goes into the cash value savings account—and the interest rate and death benefit are also guaranteed. Note: it takes years to build up substantial cash value, and if you decide to quit the policy after only a few years, you’ll be out a chunk of change and have little or no cash value to take with you. There’s also a fee to surrender the policy during the early years. If you’re in need of permanent coverage, but can’t afford the premiums, look at a term life insurance policy that can be converted to whole life. Regardless of what type of policy you’re buying, get quotes from several companies and work with a qualified life insurance professional.
- How much coverage should I get? This depends on how you want to use the insurance. If you want it for estate planning, the payout needs to cover the estate taxes so that your heirs don’t have to pay them. Note: you will want to create an “irrevocable trust” to own the life insurance and to be the beneficiary on behalf of your loved ones to keep the proceeds from becoming part of your taxable estate. If you want to take care of final expenses, make sure it covers the funeral and any debts you’ll leave behind.
- How’s the cash value going to grow? The cash value in a whole life policy has a guaranteed annual return. If the company is a mutual insurer, there might also be annual dividends. This is a share of a company’s surplus, but they’re not guaranteed. Each year, a mutual company makes the decision whether to declare dividends and the amount to give to policyholders. The dividends you get will be based on your policy’s cash value. You’ll be eligible to earn larger dividends as you maintain the policy and let the cash value grow.
- How’s the company? Check on the financial strength ratings of the insurance companies you’re comparing. Get ratings online from A.M. Best and select a company with at least a B+ rating.
Both whole life insurance and term life insurance could have a role in your financial life, and your estate planning attorney will be able to explore which one makes the most sense for your overall situation. Your estate planning attorney may also be able to refer you to a qualified life insurance professional who will be able to help you when it’s time to make a purchase decision.
Reference: Huffington Post (August 3, 2016) “5 Questions to Ask Before You Buy a Whole Life Policy”