Like everything else the life insurance industry has changed and evolved. There was a time when I would have praised whole life policies as the best available permanent insurance protection. With the innovation in the industry, today I sing a different tune.
A whole life policy offers three guarantees; the premium, the death benefit; and the cash value. But why should a life insurance policy even offer cash values? Insurance is not the most efficient investment platform. Today there are universal life insurance contracts with a no lapse guarantee which can guarantee the death benefit and premium, but offer no guarantees about the cash value. If I have a life insurance policy that has a level premium and a level death benefit but offers no cash value, it for all intents and purposes becomes a term insurance policy for the rest of my life. As long as the death benefit is there when my family needs it, I don't need cash value. After all, there are better investments than insurance. The best aspect of these "term for life" contracts is that the premiums can be significantly cheaper than whole life.
Here is an example. I have one client who had purchased three separate whole life polices over the years. The combined death benefit was about $109,000 and he was paying about $75 a month for the coverage. The three policies had a combined cash accumulation of over $38,000. He needs and wants the death benefit but the cash values are meaningless to him. He understands that if he gains access to the cash values, the death benefits will reduce. We explored options and discovered that he could transfer the cash values from the whole life policies into a new no lapse guarantee universal life contract. His new death benefit would be over $160,000 and would be guaranteed to require no additional premium. More coverage and he saves $75 a month. I think his exact words were "that is a no brainer".
There are a few things to consider:
- Access to the cash value is reduced (and may be completely lost)
- The guarantees are those of the insurance company. Like any promise, they are only as good as the company.
- Purchasing a new life insurance policy is subject to both medical and financial underwriting.
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