July 15, 2011 by wcobserver
In a previous column, I wrote about the decision of whether to buy Term Life or Cash-Value (Whole Life). But there’s never enough space to bore you with all the details. Here’s some Q & A’s about life insurance.
Question: Why do some policies have cash value while others do not?
Answer: It’s part of a plan to keep your insurance from running out before you die.
Q: Why don’t Term Life policies have cash values?
A: Because Term policies are designed only for a limited time, or term of years. It’s only a matter of if you’ll die during the term of the policy. Most people don’t!
Q: Milt, I’m not sure you answered the question!
A: Since Whole Life policies stay in force until you die, the company must pay off someday. Because it’s only a question of when, the insurance company must have the money in reserve. Since a term policy expires at the end of the term, reserves are usually not required. No reserves, no cash values.
Q: What’s all this business about Reserves?
A: A policy which promises a benefit 50 years or more in the future is a very long term contract. All states require companies to maintain invested reserves to guarantee these promises in case the company goes broke.
Q: Are cash values desirable?
A: It depends on whom you ask! I think so, but then I’m somewhat biased. Cash values make lifetime coverage affordable. And, cash values may be borrowed for emergencies or other life events. Is that handy?
Q: But the critics say the insurance company keeps your cash values when you die, and only pays the face amount… what about that?
A: The Company promised to pay the face amount of the policy when you die, or give you back your cash values if you quit the policy. They didn’t promise both. The cash values are part of the face amount, and represent the reserves the company was holding for the time you died!
Q: But the critics say that’s not fair….
A: Well what do the critics know, anyway! Some critics are distorting the facts, and are usually grinding some kind of ax to sell you something else. However, one kind of cash-value policy does, in fact, pay both. Universal Life policies have that option; however, it costs more to maintain it until death.
Q: So what’s a Universal Life Policy?
A: An effort to provide a Whole Life equivalent with flexible premiums. UL policies allow you to vary or skip premiums. Because of that flexibility, they generally do not guarantee lifetime coverage.
Q: Don’t agents like to sell cash value policies because they make more money that way?
A: Critics say that, and it’s partially true. Agents are paid a % of the premium; the cash value policy has a higher premium, so it’s a bigger ticket. Naturally, a bigger sale means bigger commissions.
Q: Aren’t cash values a poor investment?
A: Cash values should be compared to savings; not to investments. However, if you adjust for the cost of comparable amounts of term coverage over a 20 year span, cash values compare very favorably with other conservative investments. Plan to keep a cash value policy at least 15 years or more.
Q: My policy has something called Waiver of Premium…what it that about?
A: This feature is an optional rider which pays the premium for you if you become totally disabled. It works with either a Term or a Cash Value policy. In the case of a Whole Life, the entire premium is paid for you if you’re disabled, which continues to increase the cash value. This feature is very valuable because it keeps a family from losing benefits at the time of greatest need.
Q: You implied that some critics have an ulterior motive.
A: I not only imply it…I assert it as fact. Don’t let critics wreck your financial plans.
Milton Jones is an Independent Insurance Advisor with experience dating back to 1965. He holds the professional designations of CLU, ChFC, and LUTCF.