Tuesday, May 1, 2012

Term or Whole Life Insurance?

Most people I encounter who own life insurance typically only have term insurance. This is often because their friends and family have only ever had term insurance. So when faced with the choice of purchasing a permanent life insurance policy like a Whole Life insurance contract, people will struggle with the decision to do something that is unfamiliar to them.

To compound the difficulty in making such important and potentially a life or generational altering decision, most financial advisors and life insurance agents are not properly trained to structure a Whole Life contract the way the authorized advisors with Bank on Yourself are taught to do.

The conventional wisdom about Whole Life insurance is that it's unaffordable. This couldn't be when you  further from the truth!  It's only expensive if you work with an advisor or agent who doesn't understand the mechanics of how a Whole Life policy works and is unable or unwilling to properly design a policy for you!!

The big secret about a properly designed Whole Life policy is the application of special riders that reduce the cost of insurance and build cash value from the very first premium payment. These special riders allocate the majority of the total annual premium into the savings portion of the policy which puts the cash value growth on hyper-drive.

When the premiums dollars in a Whole Life contract are properly allocated, the commission an advisor receives is nearly 100% bypassed. In fact, an advisor or agent who utilizes these special riders goes from making up to 100% of the annual 1st year commission on the total premium to just 1.5% on the portion of premium allocated into these special riders. On a typical Bank on Yourself Whole Life contract, 50-70% of premium dollars are allocated towards these little known riders.

So if less premium is going to pay a commission on a Whole Life product, that means 50-70% of the premium is going to your cash value right away! Is it any wonder why advisors and agents fail to structure a Whole Life contract that best serves both your short and long term planning needs? Don't get too mad at them if you already a Whole Life policy though. It's very likely your advisor was never trained to structure a Whole Life policy the way Bank on Yourself certified advisors are trained to do so. Having been part of two very well known and respected insurance companies as a career agent, I can tell you firsthand, the financial planning community doesn't teach what I offer in my private practice. More on this below.

Another fallacy about Whole Life is that it has an investment component built into it. Whole life policies are NOT investments.  Whole life policies actually have a savings component, NOT an investment component. What's the difference? Saving accounts are engineered to protect and grow assets. They are never exposed to the risk of market loss. A whole life contract guarantees to grow the cash value each year. The only type of permanent life insurance with an investment component is a variable universal life policy which like any investment has the potential for both loss or gain. I would stay away from those.

By comparison, term insurance has no savings component. It is purely a death benefit policy that offers a fixed premium for a fixed "term". For individuals and families on a very tight budget, it is the optimal way to afford life insurance and the correct recommendation. For individuals and families who have more discretionary income to put toward savings, there is a better way to structure a life insurance portfolio by often combining both term and Whole Life insurance contracts.

Probably the most surprising fallacy is thinking a fee based and/or Certified Financial Planner will know how to structure a well thought out life insurance plan. While a fee based advisor is a good option in general, for specific life insurance purposes, I'd recommend an advisor who understands how to use single and level paid up addition riders on a whole life contract combined with term insurance to properly design an affordable and flexible life insurance portfolio. If they cannot sit down with you and show how your premium dollars are being allocated into the special riders I focus on, then they are not going to be able to explain the benefits these riders provide.

My experience with fee based or Certified Financial Planners I have interviewed is that they have never been taught to use paid-up-addition and term riders to make a whole life policy both affordable and flexible. They also have never been taught how to create a banking system utilizing Whole Life policies. 

I'll be sitting for the CFP exam soon and the oversight in the coursework regarding life insurance planning is quite telling. A properly structured whole life contract not only provides an increasing permanent death benefit but a liquid, tax-favored savings account, too. This is not the same type of policy that is commonly misunderstood and generically sold by the financial planning industry.

Bottom line, people will always stand to benefit from having a savings account and no widow or beneficiary will ever turn away an income tax-free transfer of wealth. If your budget has room to put away money for a rainy day and you would like to have that money work for you without exposing it to risk of loss and future taxes, it'll interest you to see how you can expand the life insurance protection you provide to your loved ones by using the same dollars you'd otherwise put in a bank at a lower rate of return, or possibly at risk of loss in the stock market.

For a private consultation, please call me at (925)385-6639 or email me at John@JLMws.com. So to answer the question at the top: Term or Whole Life? I usually do a blend of both.

To get the free Bank on Yourself report, go to www.FindOutMoreNow.com and enter my advisor code: JM66