FAQs About Life Insurance

As Life Insurance Awareness Month comes to an end I thought I would share some frequently asked questions about life insurance…

What is life insurance?

In its basic definition life insurance is a contract between an insurance company and an individual that is designed to provide financial compensation to the policy owner’s beneficiaries in the event of the policy owner’s death.  So prior to buying life insurance you should ask yourself one simple question “who will suffer financially if I am not here?”  Since life insurance is typically used as for income replacement the answer to this question for many people  dictates whether or not they need life insurance.  As with most things, there are exceptions to this rule of thumb.

What are some of the purposes of life insurance?

Life insurance can also be used to:

• Pay off existing mortgage
• Pay estate taxes
• Fund college education
• Protect key employees in a business
• Create an estate
• Provide money a spouse / children
• Supplement retirement income

So as you can see from the list above life insurance can have a variety of uses when it comes to planning for the future protection of loved ones among other things.  Its flexibility is one of the reasons most people require it.

How much life insurance is enough?

One of the most overlooked areas of life insurance is determining proper coverage amounts.  Most people are under insured.  The reason being they have no idea how to determine how much coverage they require.  You should take the time to decide exactly what you want to happen if something were to happen to you.  My suggestion….the most you can qualify for.  This will serve as a minimum guideline in determining the amount.

For example, if income were your major concern you might use it as the basis for your calculation.  Most insurance companies suggest 8-10 times your income as a rule of thumb.  So a person making 30,000 a year would require 300,000 in total insurance coverage.  This is the easiest way of deciding the amount of coverage however it may not be the most comprehensive.

I suggest a more comprehensive analysis of your needs by taking into consideration not only your income but your current and future expenses as well.  Your current expenses versus future expenses may not be the same and thus should be taken into account.  If it is reasonable that future expenses will be greater than your coverage amount should be increased accordingly.  Once you have decided how much coverage you need the next step is determining the length of coverage.

How long do I need insurance coverage?

Determining the length of coverage is easy to calculate and will actually determine what kind of insurance you should buy.  You should take a number of factors into consideration, such as:

• Your age and/or your spouse’s age
• The age(s) of your children
• Your health and/or spouse’s health
• Your future financial obligations (i.e. mortgage, college education, etc.)
• The number of years until your retirement

So now you should have a idea of  how much coverage you need and for how long, the next step is figuring out what kind of coverage you need.  Life insurance comes in two forms, temporary (term) and permanent (whole).

What type of insurance coverage do I need?

Term Life Insurance is simply life insurance for a specific period of time or term (5 to 30 years in most cases). Term life is, generally, the type insurance offered through group plans (like through most workplaces), credit insurance (credit cards, personal loans, etc. – the structure is the same, but the cost is usually higher for credit life), and some accidental death policies. Term life is the most affordable type of insurance in terms of cost versus death benefit. The policy is payable only upon death of the insured within the term as prescribed in the contract. The two most common variations of term life insurance are level term and decreasing or declining term.

Level term means the premiums and the death benefit remain the same or level for the entire term of the contract. This type is often used to coincide with the age of maturity for the policyholder’s children (coverage until their kids reach age 18 or 21). This way, there is a consistent benefit until the children reach an age to provide for themselves. Level term is also often used as an affordable starting point until people are better able to afford another policy type.

Decreasing or declining term policies offer a gradually decreasing/declining death benefit with a level premium. The most common use for this type is as mortgage insurance. People establish a declining payout that matches the balance of their outstanding mortgage(s) over time.

Whole Life Insurance offers a consistent death benefit (typically to age 100) with the same premium for the life of the policy and a “cash value” which accumulates over time. You get coverage for your entire life, so long as the policy is in force (the premiums are paid). Whole life is commonly used for long-term coverage needs like supplementing retirement, consistent income for a surviving spouse, death taxes, or estate liquidity. Compared to term life, the premiums are usually more expensive to start, but less than renewing or converting a term policy later in life.

The underlying “cash value” of your policy builds gradually over time. A portion of your premium is invested on behalf of your policy to generate income for the policy. The rate of return varies from company to company and policy to policy. For the most part, this is not an aggressive investment and should not be relied upon as a primary source for retirement – only as a supplement. If you cancel your policy, you will receive the cash value that has accumulated to that point, if any. The cash value may also be borrowed against for whatever purpose you choose, reinvested into premiums, or left to build until maturity. The policy is typically structured to accumulate a cash value equal to the death benefit.

There are definite benefits and advantages to a whole life policy. Many people use them as a backbone in their protection plan with term life supplements or riders. The package best suited to your needs can be difficult to put together on your own. Consulting a professional can help to narrow your selection and find you the best coverage for your situation.

Universal Life Insurance is engineered with flexibility in mind. It offers a flexible policy where you can vary the premium payments or face value, so long as you pay enough to cover the insurance part of your policy. The premium you pay (reduced by expenses) goes into a policy with an investment attached – usually a short-term money instrument with a modest yield. You are typically guaranteed a minimum yield over the life of the policy.

The premiums are often lower than a whole life policy, but there is also more uncertainty about the accumulation of cash value. You have more control over the face value and premium payments – for instance, you may decrease the face value over time to match a mortgage balance (similar to a declining term policy) or increase your premium payments to accumulate cash value more quickly. If your premium payments plus earnings fall below the cost of maintaining the policy, your value will decrease and if the value falls to far, the policy may lapse. It is important to monitor the performance of your policy.

Variable or Adjustable Life Insurance policies allow you a variable death benefit and premium based on the performance of investments you choose through the insurance carrier. The cash value accumulates through investment in bond funds, stock funds and real estate funds offered through your insurance company and chosen by you. The investment portion of your policy functions very much like a mutual fund selection.

The greatest distinction between whole life and variable life is you are responsible for the performance of your policy. You have control, yet you assume more responsibility. Great care should be taken when working with variable life. Unlike term or other insurance products, you must be very active in maintaining your account. You assume the risks typically associated with stock investments. If your investments do very well, your level of protection is increased and the long-term benefits enhanced; however, if your investments do poorly you may loose your underlying cash value and consequently your coverage.

A variable policy can be a great product selection, however careful research and proper guidance are paramount. Insurance agents who offer variable life must be licensed securities dealers and registered with the U.S. Securities and Exchange Commission. Do your research into the investments available through different companies and take care to invest wisely. An experienced insurance professional can help you select a solid company with strong investment opportunities.

The Secret Value Of Permanent Life Insurance

If whole life insurance achieved a high rate-of-return, wouldn’t everyone want it?

Or … if your life insurance could be permanent—lasting your lifetime—without ideally any additional out-of-pocket outlay, is there any reason why you wouldn’t want it?

The problem is, we’ve been taught to look at life insurance as a “product,” rather than the key player in a financial “strategy.”

How can whole life insurance protect wealth from creditors, help us continue to save money during a disability, reduce taxes, give us more income to spend at retirement, and leave a legacy to the ones we love?

The real issue is whether adding whole life insurance to a financial plan gives us more benefits, more options, more efficiency, more liquidity, and more wealth.

The real issue is whether whole life insurance gives us more value during our lifetime—making our life better while we live and helping us realize our dreams.

If it can do all of that, can you think of any reason why you wouldn’t want it?

Whole Life Insurance sometimes gets a bad rap. Some people view it to be an unproductive way to accumulate cash over the long haul.

They need to think outside the box.

Whole life insurance is one of the best tools for accumulating capital. As the key component of a financial strategy, here are some of the benefits of whole life insurance:

• A way your long-term savings can continue during a disability
• Protection of your hard-earned savings from creditors
• A guaranteed growth of your money
• An interest rate that is very competitive among “safe” saving accounts
• If structured correctly, tax-deferral without 59½ rules
• Withdrawals from cash values on a tax-favored basis
• The ability to save Term Insurance premiums

The overall “productivity” of whole life insurance is found in the imagination of the policy owner.

Here are some examples of how smart people have utilized life insurance cash values to help fulfill a dream … and create a fortune.

James Cash Penney

J.C. Penney was the son of a poor Baptist preacher. He had a vision for selling dry goods through retail stores. He began with one store in a small Wyoming town. His dream grew to be valued at over $14 billion. The retail store that bears his name is a nationwide empire.

In 1929, when the stock market crashed, Penny’s dream was nearly wiped out. He rebounded with money borrowed on his $3 million life insurance policy. That fresh infusion of cash was enough to keep him in business. How productive was that policy?

Walt Disney

Walt Disney had a mental picture of what an amusement park should look like. His standard of excellence was radical at that time. After pursuing traditional means of financing, Disney realized that if his dream were to become a reality, he would have to provide his own financing.

It made his wife nervous, but Walt Disney began to collaterally borrow money from his life insurance cash values. By the time he had $100,000, he had decided on a name for his new venture: “Disneyland.”

Doris Christopher

A home economist with two daughters, Doris Christopher started her business while searching for a new career. Using $3,000 she borrowed from a life-insurance policy, Christopher bought some basic inventory—kitchen shears, spatulas, etc. and some lumber for crates to hold her products.

Her $3,000 seed money, grew into a multi-level marketing business that Warren Buffet bought in 2002 for $1.5 billion. Her house wares enterprise: “Pampered Chef.”

Ray Kroc

Ray Kroc didn’t have the recipe … but he had a marketing idea that changed the world. On the threshold of his life-changing decision, Ray was a distributor for a milk shake equipment company.

One of Ray’s customers was a pair of brothers who had a very successful drive-in restaurant. The neon sign in front of their Southern California restaurant simply read: “McDonald’s Hamburgers.”

When the two brothers failed at an attempt to franchise their hamburger joint, Ray joined their team.

During his first eight years, Kroc did not take a salary. Taking an even bigger risk, he personally borrowed money from the bank and his life insurance to help cover the salaries of key employees.

Eventually, Kroc bought out the McDonald brothers and built his hamburger kingdom. Today, McDonald’s serves over 50 million people each day through more than 30,000 restaurants in 119 countries.

By Brad Skiles

The “Living” Benefits of Life Insurance

With September being Life Insurance Awareness Month I thought I would use the occasion to talk about life insurance. One of the problems when discussing life insurance is the perception that someone has to die in order for life insurance to be of benefit to anyone.  Nothing is further from the truth.

Life insurance inherently has benefits that can used while you are alive but these never seem to get mentioned.  Television personalities like Suze Orman and Dave Ramsey say emphatically that “term” life insurance is the ONLY way to go and use the extra money to invest in mutual funds.  This does not work, the mantra of buy term and invest the difference has turned out to be “buy term and spend the difference.”  It simply illustrates that people “don’t know what they don’t know.”

Term life insurance is straight forward.  Its cheap life insurance that covers you for a certain number of years (typically 10-30) after which it terminates.  Whole life insurance however is the opposite…it covers you for your entire life, is more expensive than term insurance and accumulates a cash value (term does not).  To use an analogy, whole life is like buying a house (builds equity) and term is like renting.  If this were the only difference than the television pundits might have a case however the devil remains in the details.

It is my belief that a whole life insurance policy should be the foundation to any financial plan even ahead of a qualified retirement plan (i.e. 401k).  Before you think that I have committed blasphemy let me explain what you get in whole life insurance and compare it to a 401k.

First the Qualified Retirement Plan (401k):

1. Tax deferred /Tax Deductible
2. IRS approved
3. Limits on contributions
4. Employer match…sometimes
5. Can invest in stock market

Now lets look at whole life insurance:

1. Tax Deferred (Not Tax Deductible)
2. No limits on contributions
3. Tax Free income and withdrawals
4. Tax Free to Heirs
5. Penalty Free Access under 59.5
6. No required distributions at age 70.5
7. Has guarantees
8. Can take out a loan over 50K (no limits)
9. No loan repayments required
10. Unlimited Investment Options (i.e rental real estate)
11. Can be used as Collateral (i.e. for loans / small business)
12. Estate Tax Free
13. Liquid (access to funds at anytime – no hardship required)
14. Disability Protection – automatic funding of retirement if you become disabled
15. Use as your own bank
16. Self Completing – if you die spouse (retirement) and children (college education) are paid for
17. Judgement Proof – protection against creditors and lawsuits
18. Potential for Dividends – more beneficial than employer match as it can potentially guarantee future tax free retirement income
19. Protection from future income tax rate increases
20. Guaranteed to grow every year
21. Not stock market based – protection against market risk
22. Long Term Care benefits – protects against the costs of health care in retirement
23. Retirement Income Flexibility -Allows you to spend down your other assets in retirement and have peace of mind
24. Provides money for terminal and chronic illnesses
25. Last but not least…death benefit – money when you need it most.

Why aren’t these benefits ever mentioned by the media?  Because it costs to obtain them or is the status quo more easy to get across to people?  Max out your 401k and buy term insurance.  I realize how hard it is for people to look outside the box for alternatives from what they have been told for years to do.  However when you look at the benefits provided by whole life insurance I would argue the extra perceived cost (versus term insurance and qualified retirement plan) is certainly worth it.

Qualified retirement plans like the 401k were never meant to be a primary source of retirement savings but were deemed a supplement to social security.  Whole life insurance deserves a look as another foundational element to any retirement plan at any age.

Why Everybody Wants Whole Life Insurance…(They Just Don’t Know It)

Since September is Life Insurance Awareness month I thought I would focus this month’s blogs on life insurance in hopes of educating and clearing up some of the misconception about it.  This is one of the most misunderstood financial vehicles around and perhaps the most important part of a true financial plan.  The following is a great article I found online (author unknown).

On some financial topics, people have become so conditioned to seeing things from a single perspective it makes them incapable of recognizing other – perhaps even better – ways of addressing these issues. The on-going fallout from the “meltdown/crisis/recession/global-economic-funk” offers a striking example of an obvious solution that almost no one seems to see:

For one reason or another, everyone wants whole life insurance.

Don’t believe it? The disbelief just further proves the point. Whole life insurance is so far outside the awareness of both average Americans and the mainstream financial press that collectively “advises” them, that they have become blind to what’s been there all along. Think about it. As various “better ideas” have fallen short of expectations or been unable to respond effectively to new economic realities, have you heard any experts, commentators, or consumers clamoring for whole life insurance as a viable answer?

And yet, the following news items and commentary make a compelling case for seeing whole life insurance for what is really is, and why everyone wants it – even if they won’t admit it.

Do Americans want a 401(k)… or do they really want Whole Life Insurance?

Here are some excerpts from a January 8, 2009 Wall Street Journal article by Eleanor Laise titled “Big Slide in 401(k)s Spurs Calls for Change.”

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information technology project manager in Longview, Washington, feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

When 401(k)s were first established in 1978, one of the selling points was the opportunity for individuals to participate in the uncertain (but historically profitable) market fluctuations. However, as Ms. Laise notes, “a market meltdown near the end of their working careers can …blow their savings to smithereens.” Quoting Alice Munnell, director of Boston College’s Center for Retirement Research: “That seems like such a fundamental flaw. It’s so crazy to have a system where people can lose half their assets right before retirement.”

In response, Congress has begun looking at ways to overhaul the 401(k) system. How? Among the proposals: government-supervised universal retirement accounts offering a “guaranteed, but relatively low, rate of return.” Another idea is an index fund of stocks and bonds whose mix becomes more conservative as workers near retirement age.

But there’s more to the 401(k) issue than just guaranteeing a retirement balance. Ms. Laise shares the experiences of another individual:

Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass. didn’t contribute anything to her 401(k) last year. Instead, she’s been focusing on paying down credit-card debt and building up an emergency reserve in case the bad economic times turn worse. She’s also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car.

After reliving the dot-com market meltdown, which knocked $100,000 off her retirement savings, she moved her entire 401(k) from diversified stock and bond holdings into cash-like investments early last year.

“I’m not going to get rich on my 401(k),” she says, “but also don’t want to get poor because of it.” She had hoped to retire early, but now figures she won’t quit work before age 65.

In both Ms. Gardner’s and Ms. Kelley’s comments, 401(k)s seem to present a number of “either/or” financial decisions. Ms. Gardner sees her investment options as either a low-yielding money market account or “huge market risk.” In a roundabout way, Ms. Kelley agrees, seeing her choices as either not getting rich, but at least avoiding poverty by choosing lower-risk, lower-return financial instruments. When it comes to extra funds, Ms. Kelley has to choose either pay down debt and build emergency funds, or contribute to the 401(k). And because of other financial needs, Ms. Kelley has already borrowed from her 401(k); like many Americans, she doesn’t have enough money to fund all the buckets (one for retirement, another for emergencies, big-ticket purchases, college funding, etc.) so filling one means stopping another.

If you were to summarize the comments from these two individuals, they could easily be considered representative of the accumulation issues of most Americans:

• They want some guarantees, yet want to achieve annual returns better than 1%.

• They have a need for accumulating liquid emergency funds.

• They want opportunities to access funds prior to retirement, either as loans or withdrawals.

Guess what? With some variation in the sentence structure, those very features will be mentioned in almost any insurance company’s brochure about whole life insurance! And these features aren’t either/or. When you make deposits to a whole life insurance policy, you can address all of those issues simultaneously. Cash values can be accumulated for emergencies or retirement. The long-term rates of return on cash values are greater than the 1% low-risk options Ms. Gardner is aware of – and they include some guarantees.

In addition, many whole life policies will offer a Waiver of Premium rider; if the insured is disabled, the insurance company will pay premiums to ensure the future growth of the cash value. And in tragic situations of an early, unexpected death, the insurance benefit delivers significant tax-free dollars in a time of great need.

As a depository for tax-advantaged retirement savings, 401(k)s may fill the bill. But as more and more Americans are discovering, they want a financial multi-tool that can serve several different functions – before and after retirement. For many Americans, a custom-fit whole life insurance policy could be their ideal solution.

Do Americans want a “Medical Expense Fund”… or do they really want Whole Life Insurance?

What is the cost of health care in retirement? Robert Powell, in March 14, 2006 MarketWatch column said:

“A 65-year-old couple retiring today will need on average a tidy $200,000 set aside to pay for medical costs in retirement, according to an annual Fidelity Investment study released this week.”

That was almost three years ago. Does anyone think medical costs have gone down since then? No? That means the need for a “tidy $200,000” is larger today.

Powell’s column elaborated on the Fidelity report, noting that Medicare B and D premiums accounted for $64,000 of the estimated costs, while cost-sharing co-pays ($72,000), and out-of-pocket costs ($64,000), comprised the rest. The $200,000 amount also didn’t include expenses from over-the-counter medicines, dental care and long-term care, and was based on an assumed life expectancy of 85. The estimate assumed the couple enjoyed reasonably good health. Add nursing home or other long-term care expenses to the list, and the total health-care cost in retirement could be staggering. To make matters worse, expenses have been increasing at a rate of 5.8% annually since Fidelity started conducting the surveys in 2002.

Now, even if you have a couple million accumulated for retirement, setting aside $200,000 in a safe, low-return financial instrument could result in a significant decrease in retirement income. It’s another one of the either/or, lose-lose decisions. Either you lose income because some assets can’t be invested in potentially high-profit, long-term opportunities, or you lose the security of having the liquidity to meet possible medical expenses.

Guess what? Whole life insurance might offer some unique solutions to medical expenses in retirement. The cash values can not only serve as a great reserve fund, but many life insurance companies offer riders that delineate terms under which a portion of the life insurance benefit can be distributed to pay costs resulting from a long-term care situation or a catastrophic terminal illness. Further, because of provisions in the 2006 Pension Protection Act, these benefits could be received on a tax-favored basis in many circumstances. In terminal situations, the amount paid could equal up to 80% of the life insurance face amount. In chronic situations, the amount paid usually varies with the age of the claimant – the older the policyholder, the higher the percentage.

These riders (sometimes referred to as Accelerated Death Benefit riders) are not intended to serve as a replacement for the stand-alone long-term care insurance (usually the whole life rider’s definitions of what constitutes an “LTC event” for which a claim can be made are not as generous or comprehensive as those in a long-term care contract). But these provisions give the insurance benefit – not just the cash values – a clearly defined financial value before death. And, Robert Lehmert explained in the June 2006 issue of the Life and Health Advisor: “Accelerated benefit riders do not require the negotiations associated with life settlements; the formula is predetermined and the entitlements can be taken at will.” Even better, if the Accelerated Benefit option is not used, beneficiaries will receive the full insurance benefit tax-free. That’s a win-win, either/or decision.

Lehmert goes on to note: “in an era of dramatically increased longevity, permanent (whole) life insurance has the potential to play a critical role in helping individuals live out their days with enhanced financial security.”

Do Americans want “Yeah, buts…” or do they really want Whole Life Insurance?

If whole life insurance is such a good product, why don’t more popular “financial experts” recommend it? And why don’t more people own it? It goes back to the opening comment: When someone is so invested in seeing things from one perspective, it can be difficult to see it differently, even if the alternative is supported by facts and logic. For these people, the answer to retirement is a 401(k), the answer to emergency funds is a savings account, the answer to college funding is a 529, and the answer to life insurance is term. Anything outside their framework doesn’t fit, and generates a dismissive “yeah, but…” response. For example:

“Yeah, but…” Hindsight Sees a Better Idea

By design, whole life insurance is conservative and predictable. It’s boring. Here’s what happens: Someone looks at historical results and says “You could have done better if you had…invested in the tech stock…, speculated in beach-front condos…flipped houses… bought term insurance, etc.” Looking backward, it’s always possible for someone, somewhere, to construct a better outcome than the one you have. This is true for every financial decision, not just life insurance. In hindsight, you could have bought a nicer home on better terms, earned more with a different mutual fund, paid less for a car.

But while hindsight can always develop a better scenario for the past, hindsight insights cannot guarantee future outcomes. Two decades of historically superior returns were irrelevant when the S & P 500 dropped over 30% in 2008. So instead of looking backward to guess what might be most profitable in the future (and occasionally guessing wrong), take a look at this: the accumulation focus of whole life insurance policies is consistent, guaranteed, long-term cash value growth.

“Yeah, but….” The Costs Exceed the Benefits

No one really argues the benefits of whole life insurance; the issue is the perceived cost of obtaining them. When compared to term insurance, whole life insurance seems inordinately expensive. (Typical comment: “If I can get $500,000 of term insurance for $35/mo., why do I have to pay $750/mo. for $500,000 of whole life?”)

But other than the life insurance benefit, whole life and term insurance are radically dissimilar products. In a different context, whole life isn’t over-priced. Consider a household with take-home earnings of $100,000/yr. that is attempting to save 12% of their income (a percentage which, by the way, most “experts” say must be increased to ensure a comfortable retirement). Maybe some of that $12,000 goes to a retirement account, some to emergency savings, some to buy term insurance, and some to an after-tax college savings fund. Or instead, maybe a sizable chunk of it is applied to a whole life policy, because the whole life policy can provide cash values, which can be used for  retirement supplement income, emergency reserves, money for college – and life insurance.

“Yeah but…” There’s Up-Front Commitment, and Delayed Gratification!

Whole life insurance is a long-term financial instrument with a long-term funding commitment. Although a whole life insurance program can be constructed in such a way that premiums can be paid for a limited period as opposed to one’s entire lifetime, the shortest paid-up period is usually seven years. A whole life insurance purchase is big-ticket purchase, paid for over time – like a car, a home, a college education. While there is some payment flexibility in most whole life policies after the first few years, whole life works best with regular funding.

Because whole life is designed with the intention of being in-force at death (unlike term insurance), the costs of providing the insurance benefit – whether death occurs tomorrow or 50 years from now – must be secured by the insurance company. Thus, in the first years of a whole life insurance policy, most of the scheduled premiums do not accumulate as cash value. For some short-term thinkers, these “start-up costs” are an insurmountable psychological barrier.

The diagram below doesn’t represent a specific numerical comparison. Rather, it illustrates the conceptual difference between whole life insurance and other non-guaranteed accumulation strategies. Plan A is a slow-starting, well-planned financial path; if you stay on the path, the desired long-term results will be attained. In contrast, Plan B, while having the potential to deliver better results than Plan A, offers no guarantees; ups may be followed by downs.

Which Approach Would You Choose?

As many Baby Boomers are finding out, what happens at the end of the plan is arguably more important that what happens in the beginning or the middle. But even though the long-term benefits of a whole life insurance program will accrue at an ever-increasing rate over time (Plan A), and even though various Plan Bs offers little assurance of finishing strong, some people simply can’t handle the longer start-up curve that comes with whole life insurance.

“Yeah but…” Is Anything Really Secure in This Economy?

In light of recent events, there’s general skepticism about any financial promises. Considering the wide-spread turmoil at once-solid financial institutions, who can say that a similar meltdown might not also occur with life insurance companies? It’s a fair question.

If we experience a complete economic and social collapse that plunges the world into a new “Dark Ages”, life insurance companies will probably go down the tubes, along with everything else. But if your sense of pessimism is that high, you better start watching your “Mad Max” and “Waterworld” DVDs for survival tips in a post-apocalyptic world, because there is no safe place for your money or your financial future.

Otherwise, there are good reasons to think life insurance companies will remain viable financial institutions, even in tough times.

In a January 11, 2009 Palm Beach Daily News article by R. Marshall Jones, JD, CLU, ChFC titled “Life Insurance: An Additional Asset Class in Difficult Times,” the author makes the following observations about whole life (or permanent) insurance companies in the wake of the past year’s economic turmoil:

Fortunately, the life insurance industry has almost none of the problems of Wall Street… Until recently, permanent life insurance was arguably the financial industry’s most complex instrument. Fortunately, due to its complexity, life insurance is highly regulated to assure there are always sufficient, safe assets to honor its guarantees. This is referred to as statutory accounting. For more than 100 years, every life insurance death benefit has been paid.

All life insurance companies use statutory accounting. In addition, publicly traded insurance companies use GAAP accounting. It allows them to report the expected profitability of products that require reserves to back their contractual liabilities.

“Yeah but…” It’s Too Complex and Too Boring for Media Sound Bites

Jones doesn’t say life insurance companies can’t fail. But life insurance companies have a proven track record of stability. And while whole life insurance may be considered a complex financial instrument, it isn’t an untested new idea (like credit-default-swaps or other next-generation financial derivatives that were “virtually unsupervised,” according to Jones). Whole life insurance has been around, been regulated, been through good times and bad – and succeeded.

Like Mr. Jones said in the previous paragraph, whole life insurance is a complex financial instrument. It takes time to explain it (even a slim “overview” article like this one takes over four pages!). And it takes even more time and personal attention to tailor a whole life program that fits an individual’s unique financial circumstances. There is no one-size-fits-all plan for whole life, and this is not a do-it-yourself project.

These characteristics are not ones that fit easily in column-length newspaper or magazine article, or a thirty-second analysis from a financial talking-head on a television program. And since whole life insurance is a long-term financial instrument, there’s not much demand for headline-grabbing topics like “Experts Pick Top 5 Life insurance Policies for 2009” or “Best Whole Life Plans to Implement Right Now!”

Instead, establishing a successful whole life insurance program requires several face-to-face consultations with a knowledgeable professional, and regular reviews. Yeah, it sounds more like going to the dentist than dinner and a movie. Whole life insurance may be serious, complex, boring – but it works.

Bottom Line: Everyone wants Whole Life Insurance

Consider these common “yeah buts…” concerning whole life insurance. Should any of them really stop someone from taking a closer look at how whole life insurance might fit in their financial situation?

No.

Does everyone need whole life insurance?

No.

Does everyone want whole life insurance?

The opinion here is yes. Whole life insurance delivers a unique and flexible assortment of financial benefits. Properly situated in your financial program, having whole life insurance is better than not having it. And with the assistance of a skilled insurance professional, there are many ways to make whole life fit your plans.

Whole life insurance is a “financial classic.” Newer products and approaches may grab popular attention, but as a solid financial foundation for every stage of life, whole life continues to be in style.

It’s time to admit it…Everyone Wants Whole Life Insurance.

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