WHOLE LIFE INSURANCE FOR DUMMIES
STOP! Don’t buy Whole Life before reading this!
Do not even think about requesting information about whole life insurance before reading this article.
Life insurance is a good decision for your financial future, but be careful before you start requesting quotes. As this will open up the flood gates of agents who will start to call you. You may be bombarded with information you do not understand.
In this article we will go over the top five things you must know about whole life insurance.
- Understanding Whole Life Insurance
- Reasons To Purchase A Whole Life
- Using A Whole Life Policy
- Picking The Right Whole Life
- The Process Of Purchase
This is meant as a a guide for you to make the best decision possible. We will provide you with a lot of information, which may be overwhelming for some.
However, our agents are experts in whole life, so if all you want is a quote contact us here.
1. Understanding Whole Life Insurance
Whole life insurance is the original insurance. When insurance started, all that existed was whole life. Understanding whole life insurance is not as difficult as it may seem.
However, make sure to educate yourself about the different types of life insurance available to you. There are several different types of insurance policies that may fit your needs such as the ones below:
Different types of life insurance policies:
- Whole Life Insurance
- Term Life Insurance
- Variable Life Insurance
- Indexed Universal Life Insurance
- Universal Life Insurance
- Guaranteed Issue Life Insurance
- Accidental Death Insurance
So many different choices…
Here are the differences and how they work:
Whole Life Insurance
Whole life insurance also referred to as “permanent insurance” is the most straightforward option. Whole Life Insurance policies have a level premium, they accumulate a guaranteed amount of cash value each year and the death benefit is also guaranteed as long as you live. Additionally if you were to pass away the beneficiaries would receive the death benefit tax free.
As a result of the guarantees, whole life typically has a higher premium cost to the policy owner.
The Mortgage Analogy
A whole life policy is very similar to how your home mortgage works. When you purchase a home let’s say for $200,000 you commit to pay a monthly mortgage payment. This monthly mortgage payment is just like a whole life insurance premium. At the beginning the premiums seem very costly because you are paying down mostly interest on the loan.
The same will hold true with your Whole life policy. In the early years you will be paying your premiums and there will seem to be very little in your cash value savings account.
Not to worry, just like with your mortgage over time you will see the equity continue to grow!
Whole life has one big upside to your mortgage however… you have asset protection in way of your death benefit.
Term Life Insurance
Term insurance provides pure death benefit protection for a specific period or term. Most typically 10, 15, 20, or 30 years. Most term policies that are purchased with a specific “term” are designed to have a level premium for the duration of that term selected. Term insurance is the cheapest choice in terms of premium cost.
Think of term insurance as “renting” you’re insurance. When you buy term you are essentially renting that $200,000 home we referenced in the above whole life description for a period of time.
Now, don’t get me wrong I am not trying to put down anyone reading this that renting is a bad options. Renting is a great option for many people and this is why Term insurance is very popular with so many people as if offers the protection needed at a fraction of the cost. What you will want to keep in mind is that not all Term insurance policies are created equal.
Some policies are very basic and some come with options that you will appreciate in the years to come.
Think of this as renting a home with no furniture or renting a home with it being fully furnished. This is why some term insurance is more costly than others.
Related: Haven Term Life Insurance Review
Universal Life Insurance
Universal Life Insurance is most well-known for its flexibility. This has always been a major selling point for this type of policy. Universal life policies have premiums payments that can be adjusted during the life of the contract. As long as you meet a minimum amount due to keep the contract in force your death benefit stays the same.
On the flip side if you fall into a large sum of cash and you want to build up the cash value account you could also add additional funds to the policy.
A universal policy is like a permanent term insurance policy. The cash value account is not intended for use like a whole life policy rather it is there to keep your premiums as level as possible over the lifetime of the contract.
You can read further here: Universal Life vs Whole Life
Universal Life can be a good choice for permanent coverage. Specially if you chose a Guaranteed Universal Life policy.
Variable Universal Life Insurance
Variable Universal life insurance is a universal life insurance policy with an investment component. This investment component lets you decide how a portion of your cash value is allocated into stocks and bonds. If you are a risk taker then variable life insurance could potentially be attractive if you want to maximize your cash value.
When considering a variable life insurance policy it would be wise to speak with a Fee-only financial advisor or have a strong understanding of the market. Many who look into life insurance are looking to find ways to avoid risk so make sure you are knowable before buying this type of insurance.
This of this policy as purchasing a home with a variable loan rate mortgage. Sure your mortgages interest rates could stay low and you would be better off but you are also exposing yourself to great risk of these rates increasing. If your rates were to increase this could create major financial issues potentially leading to default in the future.
Additional reading: Variable Universal Life vs Whole Life.
Indexed Universal Life Insurance
Index universal life insurance is another Whole life alternative. This policy also has an investment component letting you allocate up to 100% of your cash value to a stock market index, such as the S&P 500 or Nasdaq 100. If the index sees positive growth then the cash value grows, although there is a cap to this.
Even if the index has negative returns. You will not lose cash value in your policy. Indexed universal life is a very popular option. Index universal life offer many of the upsides that a variable life policy offers without many of the risks.
Check out this article: Indexed Universal Life vs Whole Life
Guaranteed Issue Life Insurance
Guaranteed issue life insurance provides coverage without the need to complete any medical underwriting. If you need life insurance and do not want to jump through any hoops then this type of insurance is a great option. The insurance companies will not deny an applicant insurance as long as they pay their premiums.
Since the insurance company is taking on more risk without fully underwriting the insured the insurance premiums are typically higher. In addition to charging more for the coverage some of the guarantied issue policies are designed with a graded benefit or return of premium clause.
Graded benefits will not pay a full benefit if the insured was to die two years of the policy. Usually there is a return of premiums paid as the benefit.
Accidental Death Insurance
Accidental Death Insurance provides a benefit to the beneficiaries of an insured in the event of a death or partial/complete dismemberment that resulted from a covered accident. These policies will pay out in addition to any other coverages that the insured may have inforce such as personal disability coverage and work provided insurances.
Coverages are most typically in the amount of $20,000 to $500,000 and are on an individual policy or sold through an employer’s benefits offerings. If a death were to occur due to an accident, a benefit would be paid in full.
Many policies also pay out if there is a dismemberment incident.
2. Reasons To Purchase A Whole Life Insurance
So know that you know about all the different types of insurance options are out there it is time to consider…
A simple question you need to ask yourself is:
Why are you considering buying whole life insurance?
Most people buy whole life insurance for one of two reasons: Cash Value or Death Benefit.
These are very different reasons to purchase whole life insurance, but let’s start with death benefit as this applies to any kind of life insurance.
Death Benefit Protection
If you are buying whole life insurance only for the death benefit protection this is a strong indicator that a basic traditional whole life insurance policy design may not be the proper fit for your situation. You will want to make this clear to your agent when you start calling around. Depending on your personal needs and health situation you will want to look at a policy such as a Universal Life Insurance or Term Life Insurance.
The following formula is a safe way to calculate your insurance needs when buying for Death Benefit Protection Only:
In reality we need to determine just how much life insurance you will need, not just whole life, but any type.
This can be a very difficult question to answer and you must look at your situation and ask yourself some questions. The following formula can help. Also we have an article that can help you: How Much Whole Life Do I Need?
First put together a list of all of your debts? This will include any and all items you feel need to be covered. Most common are items like (Mortgage, Student Loans, Car Loans, Credit Cards, ect). You will want to add up all the debt that you owe still on items.
Mortgage debt: $200,000
Student Loan: $52,000
Car Loan: $28,000
Credit Card’s $10,000
Total – $290,000
Next you will want to calculate how much income will be needed to replace what you are currently providing your family. Why is income replacement important? If you were to pass away and only leave enough to cover your debts would this leave your family in a situation where they could survive without your income as well?
If you have ever experienced a loss in your family it can be very difficult to get back into the work force after such a traumatic event. Additionally if you have kids and a parent dies this can lead to additional costs like daycare just to allow the other spouse to go back to work.
How Much Insurance Then?
Pro Tip: Think about all the things that you pay for with your income. It is very difficult to figure out how much life insurance you really need unless you have a good snap shot of what you need to live. If you want a simple way to find this out print a bank statement or use an app like MINT.com to figure out what your monthly budget looks like.
Lets assume you review your budget and on a monthly basis you need to have $40,000/year to replace your income. Now that you know this information we can plug it into our calculations.
With a Life Insurance Benefit of $1,000,000 tax free. This benefit can be put to work to create investment income.
$1,000,000 earning 6% = $60,000 / Year
After paying UNCLE SAM (Taxes) take home income is approximately $40,000.
The above is a simple example of to illustrate how much protection is needed to actually produce income for a family. The actual amount needed can change drastically depending on your age an personal situation.
For example: If you are in your thirties with one spouse earning $120,000 and the other spouse stays at home watching two kids age 4 and 2.
You would need to purchase at least $3,000,000 of coverage to replace your income of $120,000 after taxes.
Death Benefit = Income
$1,000,000 = $40,000
$2,000,000 = $80,000
$3,000,000 = $120,000
A Whole life policy blended with a term rider is a great option. If you are looking to buy enough insurance to cover income but also want to have a Whole Life policy. as about Term Insurance Riders that will allow you to have to obtain the benefit amount that you need at a fraction of the cost.
Lastly you will want to calculate and plan to take care of any education expenses that may be incurred in the future if you were to pass.
Do you want to prepare for public high school or private high school? Public College or Private college? This is a decision that you will need to make.
Estimates from collegedata.com say that the average cost of tuition and fees for 2017-18 is about $34,740 for a private college. Also $9,970 for a state residents at public college, and $25,620 for out-of -state residents attending a public college.
So depending on your wishes you may want to plan for at least $40k – $140,000 per child. Many of our clients like to use a whole life for college savings, here is an article on it: whole life insurance for kids.
Cash Value or Buying Whole Life As An Investment?
If you are buying life insurance as an “investment” then the above DIE formula will not help you in finding a design that will meet your expectation.
Whole life insurance has some very favorable features but in order to have a policy that is going offer you high performance and then leverage you desire you will not be able to buy this off the shelf at Walmart or on Amazon (Potentially someday).
For starters look at all the benefits that permanent life insurance has over other investment options.
Top 3 considerations when buying whole life as an investment?
In reality, we cannot discuss in depth how the cash value works, without understanding what is the purpose of the insurance.
3. Using A Whole Life Insurance
How Do You Want To Use Your Whole Life Insurance?
Depending on how you would like to use your cash value life insurance this could drastically change what design you are going to pick.
- Do you want to use it for buying real estate?
- Are you looking to use it to supplement retirement?
- Do you want it for business opportunities?
- Do you want it for education savings?
- Maybe you want it for a vacation?
Regardless of why you want to have whole life insurance each one of these objective will have a design best suited for it.
How Much Can You Save Per Month?
Whole life insurance is definitely not for everyone. If you do not have low performing assets or the ability to save then whole life insurance as an investment tool may not be the best starting point.
If you do however have excess cash then how much of it can you afford to save on a tax differed basis? $100, $500, $1000, $2000 per month?
Would you like to save a large sum upfront and then only have to fund your policy for a few years after with a smaller premium. Would you like to only make one premium payment? All of these are options!
When you are looking for life insurance as an “investment” the major concern is the cash value not the death benefit amount.
Keep in mind that dependence on what you are looking to accomplish you may need a substantial death benefit to avoid your policy from hitting a MEC limit and becoming a modified endowment contract. If a contract MEC’S you will lose many of the tax benefits of whole life insurance.
How Soon Would You Like To Access Your Cash Value?
Timing is everything and with whole life insurance it is no different. When you are planning to access your cash values the time that you would like to do so can make a very larger difference on the policy design
- Will you access your cash value in the first 1-5 years?
- Do you want to access your cash value in years 10 -20?
- Do you want to access cash value at age 65?
Once you have a clear understanding of you investment objectives you are half way there. Then you need to know how you would like to use your cash value life insurance. This can help an agent guide you to the right whole life.
Feel free to reach out to one of our Top Whole Life agents. Our cash value life insurance experts can help put together the best policy design.
4. Picking The Right Whole Life Insurance
Once you know the amount of coverage to buy, start looking at specific life insurance policies.
It’s good to keep a few things in mind while you’re shopping:
- Be careful to enter you information on every site you check out. There are many sites that once enter your information agents will start to reach out to you and many have high-pressure sales tactics.
- The cost of a whole life insurance insurance can be very different for nearly identical policies. When shopping for whole life insurance especially if it is with an “investment focus”, you need to make sure you are working with someone who has experience with custom designed policies. Don’t settle for the first quote you receive, reach out to multiple brokers. Once you start talking to multiple agents you will want to to keep asking questions to fully understand the differences so you can pick the best policy.
- Do not go for the cheapest policy. An cheap premium isn’t the best pick all the time. You will need to consider company strength, cash value growth, and past performance.
- You need to get quotes with your own health ratings. If you are overweight or you smoke your prices and cash value will be very different from someone that doesn’t.
5. The Process Of Purchase
We will go over what to expect from the application process.
Total Application Time
Typically 3-5 Weeks
The entire application process from start to finish generally takes 3-5 weeks. This process can sometimes be shorter especially today with algorithmic underwriting.
We have seen clients approved in 3-7 days! We have also however seen clients take much longer to be approved. The most common cause of a longer processing times is an applicant with a complex health history.
There have been times where information is needed from a doctor. This can take 30+ days or more, and it delays the whole process.
What to expect
- Fill out an application covering basic info and job details. (This can be done over the phone or send to you via email and scanned back.)
- Be ready to provide Drivers license, income documentation, employment data.
- Once you have completed all the information you need to sign (E-sign or wet signature) to start the process.
This option doesn’t apply if you picked a non-medial whole life. What to expect from your medical exam:
- A nurse will come to you.
- The nurse will measure your height, weight, blood pressure and pulse.
- Then you will need to give a blood sample and urine sample.
- Schedule the exam for early in the morning.
- 24 hours before the exam
- Avoid caffeine, sugar, and alcohol.
- Avoid over-the-counter drugs as they might interfere with your test results.
- 6-8 hours before the exam
- Don’t eat anything else until you’ve completed the exam.
- Don’t engage in any strenuous exercise.
- 1 hour before the exam
- Drink a glass of water to help ensure you’ll be able to provide a urine sample.
What to expect
- An insurer representative will call you, as scheduled, to ask about your lifestyle (e.g., travel & hobbies) and health history.
- Your broker should provide a list of the questions beforehand so you know what to expect.
- Have the name, address and phone number of your primary care physician handy.
Underwriting and Approval
What to expect
- If all looks good with your medical exam and your phone interview you should hear from your agent very quickly
- If things don’t looks perfect there is a chance that the insurer may contact you to ask for more information. This would extend the underwriting time.
- Once a final decision has been reached your agent will reach out with the news. You will want to review the offer and if it is inline with your wishes sign a delivery receipt. Then authorize the payment method to activate the policy.
- Just remember being approved for a life insurance policy is not guaranteed. So any offer from an insurance company is a good offer. If you feel as something does not match up, and you should have had better underwriting, your agent should reach out and fight for you. Mistakes are made and fighting for the best rate can be worth thousands!
Policy Goes Into Effect
What to expect
- Once your application is approved, the insurer will notify you and request payment. You get a paper or electronic policy which is a certificate of proof that your policy is in effect.
- Store your policy and a copy of your application with your other important documents. This way you’ll be able to reference it in the future. You should also make sure your beneficiary knows about the policy and has access to it.
And that’s the whole process from start to finish!
So as you learned what whole life insurance is, how to use it and how to chose the right one for you.
Once you understand what you are looking for your decision is easy.
If all you want now is a quote, you can get one here: Whole Life Quote
If you want help picking the best whole life then try this article: Top 7 Companies For Whole Life Insurance For Cash Value
Leave us a comment: Are you looking for Cash Value or Death Benefit?