Whats the Best Life Insurance Policy?
What is the best life insurance policy? You’ll talk to different life insurance agents, financial advisers, and financial planners who will tell you different answers. But they aren’t necessarily as knowledgeable as they should be in some cases. And, there may be cases of conflicts of interest.
One correct answer to the question, “what is the best life insurance policy?” is always “the one that is best suited to my individual needs and financial goals.” Everyone has a personal situation involving their current income and assets, their ability to make more money, their living situation such as whether or not they have children or a mortgage, and life goals and dreams. Any life insurance policy needs to be customized to take all of these into consideration.
However, when people are asking the question of what is the best life insurance policy for them, they also need to have answered the question of which life insurance PRODUCT is the best suited for their needs–not merely how much death benefit they should have on their life and other minute details like that. And this is where some bones of contention can be found.
Speaking basically, there are three types of life insurance product. These are term, whole life, and variable universal life.
Term life insurance was the original life insurance and for a long time it was the only type that anyone could buy (there were different variations of it, however). Term life works the way its name implies. You take out a life insurance policy that will last for a certain term, or period of time. When this term is about to expire, the policy holder can renew the policy or take out a new one–or, they can just let the policy expire and lose their life insurance (or at least that portion of it). If the policy holder does not die while a term life policy is in force, they have forfeited all of their premium money when the policy expires. They no longer need to pay premiums, but they also have lost their death benefit.
Because people began questioning the wisdom of this more and more as Americans became more and more prosperous, around the middle of the 20th century a new type of life insurance was invented: whole life. As its name implies, a person is supposed to keep this policy for their whole life. In truth, whole life policies do have an expiration date after which they cannot be renewed by the insured. However, this is intended to be a date which occurs when the insured, if s/he is still alive, is at an advanced age–and therefore, the odds are that the insured will die while the policy is in force.
Whole life policies, however, build a tax-sheltered cash value inside them. This usually begins accumulating after the policy has been in force for a handful of years. The insured is allowed to draw upon this cash value while they are still alive. This cash value represents a dividend from the insurance company. Eventually, if the policy is kept in force (premiums paid), a whole life policy can begin paying for itself–part of the dividends that would have gone into the policy are simply used to pay the premiums for the insured. With most whole life insurance policies, eventually the face value (death benefit) can start rising when the accumulated cash value gets to be high enough. And, if the insured is still alive when the policy expires, such as age 95 or 100, the insurance company will cut them a check for whatever the full face amount is at that time.
As one might guess, there’s a catch. Term life insurance is far less expensive than whole life. The life insurance company needs all that extra money to pay for the additional administrative costs and to be able to invest enough money to afford to pay the dividend–build the cash value.
However, there are other catches that most people are left in the dark about. Whole life policies pay agents a higher commission than term life policies, too. Now, some will say this is justified because whole life is a better product, and agents should be given an incentive to sell more of it than term. Unfortunately…life insurance was never intended to last for one’s “whole life”. Life insurance was always intended to be taken out while one is younger and used to insure against an untimely death that would financially harm one’s surviving loved ones before one had had the time to amass enough assets to do away with those concerns–and therefore no longer need life insurance.
Agents are trained to tell prospects that term life is like renting, while whole life is like owning your own home. And even though owning your own home costs more up front, it’s far more valuable than just renting. This sounds wise on the surface, but when one understands that a residence and a life insurance policy are meeting two very different needs, the analogy falls flat.
As the general public became more financially astute over the decades, a lot of people began finding another gripe with whole life: its cash value returns really aren’t all that good. Yes, the tax-sheltered part is great, but financially sophisticated people could blow away those returns with their own investing–and make more money even after taxes! And, the less money they shelled out for life insurance premiums, the more they had available to invest!
Enter the next life insurance industry invention–variable universal life, which was developed in the early 1990s. It is variable universal life which is the best life insurance policy for the great majority of people, as more and more financial professionals are coming to agree.
Variable universal life is a “bundled” financial vessel. It’s a term life policy bound together with an actual investment portfolio. The life insurance company selects the investment choices but the insured is the one who chooses where and how to allocate their payments. They can take greater or less risk to try to build greater or less cash value. And since this is a life insurance product, that cash value still accumulates tax-sheltered! Yet, the potential returns on investment are considerably greater than the bond-like returns of whole life.
With variable universal life, the insured can place extra money into the policy (up to limits set by the insurance company and SEC and state regulations). They only need to pay enough to finance the term life insurance portion–everything else they pay over that goes toward their investment portion. Agents set up a set payment with the insured, but the insured can increase or decrease the payments at will within regulations as long as the term life policy is funded.
As with whole life, the cash value can be drawn upon while the insured is alive, and when it builds high enough it can be used to pay the policy premiums. The actual insurance portion costs less than whole life, yet the potential cash values are substantially greater than what whole life offers. And there’s the incredible benefit of tax-sheltered accumulation.
Different personal situations do vary and may call for different life insurance products, but variable universal life insurance is the solution to the problem of what is the best life insurance policy for the great majority. It’s also possible to buy this kind of life insurance from people who sell it commission-free–they make all of their money on percentage fees based upon how well your investment portion does. The more you make, they more they make. It’s win-win–and you beat the tax man while protecting your loved ones.
