Previously published in FINE Magazine
To recap, term life insurance is ideal for short-term liquidity needs with a guaranteed death benefit & universal life insurance provides a permanent solution with more flexibility than whole life.
Alas, this leaves us with whole life insurance. Whole life is a permanent insurance policy that has a fixed premium and guaranteed death benefit like term life insurance. Whole life builds cash value like a universal policy and has its own additional benefits including favorable loan privileges and the potential for dividends. The additional predictability, provided with whole life insurance products, results in more expensive offerings, especially in the earlier years.
Due to the tax-free growth in cash value and the relatively predictable growth rate, whole life insurance is often used as part of a retirement strategy to provide an additional source of income in addition to your qualified plan money (including your IRA), social security and investment income. You may use the whole life policy to borrow money on a tax-deferred or tax-free basis in the form of policy loans (which are ultimately paid back with the income tax-free death benefit).
Many advisors focus on the high cost to deter buyers from whole life insurance… and they may be correct, in many cases. But, like anything else, there are always appropriate times to choose a whole life policy dependent on your long-term goals and your financial situation.
So, when is it the right fit? Let’s see if you can get a better idea by assessing the following factors:
For example, whole life insurance can be used to fund a retirement plan, provide liquidity to pay estate taxes and even provide cash to fund a buy-sell agreement.
Have you thoroughly reviewed all other wealth preservation and tax-favored vehicles?
While whole life insurance grows income tax-free and provides wealth preservation under state law, it is crucial to consider maximizing contributions to retirement plans (e.g. 401k, IRA, HSA, Profit Sharing Plan, etc.) before making a final purchasing decision.
Is predictability more important to you than flexibility is?
Most whole life insurance products feature level premiums, which means that your insurance company cannot raise prices as you get older or if you get sick.
However, this predictability comes at a cost. Typically, this cost will result in higher initial internal costs because the pure insurance cost is level.
In summary, after an evaluation of your goals and needs, you may decide whole life is a good option for you. To ensure you minimize your risk and find the right solution for you, make sure to:
• Purchase from a highly rated company
• Understand the terms of loans against cash value
• Ensure you will be able to pay the premiums until death
• Purchase the appropriate amount of insurance
Like other financial planning decisions, it is important to consult an experienced estate planning attorney about income and estate tax consequences of purchasing life insurance. A qualified estate planning attorney can provide an unbiased evaluation of your estate and make recommendations regarding the appropriate level of insurance and the type that best fits your family’s situation.