Whole Life Insurance – Keep It or Toss It?
Life insurance can be an important source of funds for your family in the event of your premature death. The insurance you purchase will increase the likelihood that your family will be able to continue in the manner to which they have been accustomed to should anything happen to you. Additionally, it will ensure your liabilities are paid off, your funeral and burial expeses are covered and the financial goals you are working towards are fulfilled.
Life insurance marketing is confusing with many different policies to choose from in the marketplace. Like many things in life, what may have seemed like a good idea many years ago, now, may not seem so good. Such may be the case with a Whole Life Insurance Policy.
Whole Life Insurance is designed to provide coverage for the life of the insured. Whole life policies generally offer fixed premiums, guaranteed death benefits and are designed to build tax deferred cash value. For that reason, a whole life insurance policy can be described as providing life insurance protection with a savings feature. Premiums for whole life insurance can be much higher than premiums you would pay initially for the same amount of term insurance, but they are smaller than the premiums you would eventually pay if you were to keep renewing a term insurance policy until the insured’s later years. Whole life insurance is a good choice for you if you want to ensure that you have a life insurance policy in place for your entire lifetime and can comfortably afford the premiums, or if it fits within the framework of your estate or retirement plan.
Since “life happens”, it is always wise to at least annually review your insurance needs. A CFP® professional can help you determine if a life insurance policy you bought many years ago is still right for you and your family or if it is best to “toss it” altogether or switch to a different type of policy. When reviewing your current policy basically, you have three options:
- Cash Surrender - If you would like to “toss” the policy and you are the owner of the policy, you are entitled to the stated cash value amount in the policy less any loans or surrender fees. It is important to keep in mind, any cash received that is greater than the net premiums paid is considered income and is taxable to the policy owner!
- Extended Term - Often, once children come along, and the daily expenses begin to mount, affording the premiums on a whole life policy can be daunting. Additionally, you may feel you only need the policy for a certain number of years, perhaps to cover a mortgage or college expenses. This option allows the face value to remain the same for a certain period of time. The cash value would be used to determine this period of time and to pay the remaining premium payments.
- Reduced Paid Up - For those who want insurance for their whole life but who again find the current premiums overwhelming, this feature allows the policy to continue for the rest of their life but at a reduced face amount. So instead of having a $2MM whole life insurance policy he or she would only have a $1MM policy. The cash value would be used to purchase this reduced paid up policy. No additional premiums would be paid.
Before choosing any insurance policy or deciding to keep or toss a current policy, it is wise to visit a NAPFA Registered CERTIFIED FINANCIAL PLANNER™ professional to assess your insurance needs.