Let us begin with a definition. What is whole life insurance? The industry called permanent insurance. What they interpret as meaning it is always there for you (as long as you pay premiums and species are not in). Wow! I can tell you in cash? Wait, we'll get to that. This is in contrast to insurance, which, as its name suggests, is only valid for a period - a number of years, then it disappears, it is nonexistent. So when you buy whole life insurance? When there is a debt exists or will exist, you do not want to stick to your heirs to pay.
What are they? The tax on estates, for example. In the case of the rich, the tax can significantly reduce the value of your estate. Also succession of lawyers, last I checked, is still charging for their services. So you die and you need at the hospital, a bundle of money that your insurance does not cover. Have you looked at the cost of funerals these days? You are in love with your heirs, and you want to protect against such "after you are dead" of spending, what are you doing? The whole life insurance comes to the rescue.
Of course, there are certain drawbacks and disadvantages of buying whole life insurance. The first is the cash value. What is the value in cash? This is the most important thing to recognize about whole life insurance. Wrapped in a fancy, fine print, difficult to understand the language, when you buy whole life insurance you are actually buying two things. That is why it is so expensive. Part of your premium goes to savings (or value if you prefer the jargon of the industry). The bad news is when you die; your heirs get only the face value of the policy.
Insurance companies have an explanation for swallowing your values. Ask them to explain to you. I cannot. Before dying, you can cancel the policy and they will give you the value, or you can borrow against the cash value. The second thing is not to be missed "dividends". I discuss the background on my site (see below in the author box for the URL) for a discussion of these "dividends". The rapid conclusion I draw is: Never buy a policy that "pays dividends."
In conclusion, there are times when it is certainly advantageous to consider the purchase of whole life insurance. As with any financial product, you, know exactly what you're getting into before deciding to purchase. Life insurance companies are sound financial institutions and have an excellent reputation for paying claims. Rarely will go under due to mismanagement, but the industry finds a way to pay all their claims. Remember what the spirit said: "Overall, it is better to buy shares of the insurance company that the purchase of insurance." Insurance companies are in place to make a profit, and when they do not, they raise their premiums.
Not everything in life works out, including, sometimes, life insurance policies. If you stop paying premiums, your life insurance policy lapses — meaning coverage ends. If you stop paying for a term life insurance policy and exceed the insurer's grace period (possibly 30 days), your policy lapses. Make sure that's a consequence you intend: You're not insured after the grace period and can't "reactivate" the same life insurance policy.
If you stop paying on a whole life insurance policy, you may have more leeway. If you have accumulated cash value within the policy, your insurer will likely draw down the cash value account to cover premiums.
According to the 2007 "U.S. Individual Life Insurance Persistency Update" by LIMRA International and the Society of Actuaries (SOA), the overall annual lapse rate is 3.5 percent for whole life insurance, 7 percent for term life insurance, 4.6 percent for universal life insurance (UL) and 5.7 percent for variable universal life insurance (VUL).
Some folks pay for decades and decades on their life insurance policies and then throw in the towel and lapse their policies. What happened?
There are countless reasons someone might decide to lapse a life insurance policy. Most have to do with no longer having the discretionary income to continue paying premiums. John Dressner, Senior Vice President of LIFE Foundation, a nonprofit consumer-education organization, says, "Lapses are usually not for lack of desire for coverage but because of financial conflicts."
Life insurance experts have seen people lapse life insurance policies when a job loss, divorce, large medical expense or business loss means budgets must tighten. Or they buy a new television rather than pay their life insurance premiums. (True story.) Other times, policyholders are replacing their current policy with a new one.
Sometimes the decision to lapse is more emotional: The benefits seem too far off in the future. And sometimes policyholders lose contact with the agent who originally sold them the life insurance policy, so they feel nobody is available to address their questions about lapsing it.
Dressner points out that "someone bought it for a reason, because they wanted the protection." If you're thinking of lapsing a current life insurance policy, think carefully about whether you'd want coverage in the future, when buying a new policy may result in higher life insurance rate due to your age and possible health problems.
While there are no studies on the exact reasons people have lapsed their policies, we can learn from past life insurance buyers who jumped ship. Here are some tips for life insurance shopping based on lapses by other buyers.
Choose a guaranteed level premium for the entire period you need coverage.
If you're looking at term life insurance, consider buying a policy with guaranteed level premiums for the entire period you want to be insured, rather than face an increase after your guaranteed-premium period ends. The LIMRA/SOA study shows that lapse rates spike after the guaranteed-level premium periods. Perhaps policyholders were satisfied paying the level premiums but weren't willing to continue at a higher life insurance rate.
Consider this: Among buyers of 10-year level term, 40 percent dropped their policies when the guaranteed-premium period ended, and 30 percent of holders of 15-year level term stopped paying when the premiums went up.
Further, those who pay "substandard" rates (issued due to ill health) abandon their policies in larger numbers after initial rate-guarantee periods, according to LIMRA and SOA.
Buy enough life insurance coverage for your needs. Are you buying a life insurance policy with a small face amount? Think carefully about whether that policy is sufficient coverage for you, because history shows that almost half of people with whole life insurance policies of $5,000 or under abandon them within the first year (over 45 percent do, according to the LIMRA/SOA study). People with larger whole life insurance policies are far more likely to hold on to them.
This trend extends to other policy types. For example, buyers of annual renewable term policies under $200,000 lapse them more in the first five years than buyers of larger policies. (After year five the gap closes.)
The difference in life insurance policy size is quite noticeable with UL, where about 33 percent of those with policies under $15,000 lapse their policies in each of the first three years, as opposed to about 5 to 10 percent of those with larger face amounts. If you're buying whole life insurance, commit long-term.
The highest lapse rates for whole life policies are in the first five years. After that, lapse rates settle down at between 3 to 5 percent for whole life policies, according to LIMRA and SOA. Don't throw away your money by paying into a whole life policy for one to five years, only to abandon it. Make sure you understand what you are buying. This is true especially if you are looking at universal life and variable universal life, which can have many "moving parts" that affect your premiums due and death benefit.
Match your coverage to your life stage. If you're under age 30 and buying a life insurance policy, consider carefully whether you're committed to paying that premium bill. Others like you, age 20 to 29, abandon their policies in higher numbers than older buyers, according to LIMRA and SOA. Find the easiest way to pay.
Consider paying your premium bill through electronic funds transfer from your bank account. Policyholders who pay that way are more likely to keep their policies, perhaps because they never have to sit down and write a check.
Add a "disability waiver of premium" rider to your life insurance policy.
Life insurance experts see many policies lapse due to a disability that puts the policyholder out of work. A disability waiver of premium rider will cover your premium payments in this case.
Shop for a good life insurance rate from the start. If you will be issued a policy with a smoking or "substandard" rate, make sure you can keep up with premium payments. People in those rate classes lapse their policies more often in the first five years. For example, about 18 percent of smokers with whole life policies lapse them in the first year as opposed to 11 percent of nonsmokers, according to LIMRA and SOA.
No matter what rate class you fall into, knowing that you secured a competitive life insurance price will make paying your premium bill easier.
Both Bestinsurance George & Amy Danise are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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