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December 14, 2011

Should you buy life insurance because of the promised guarantees?

A December 6th article in the Wall Street Journal reported that a growing number of investors are buying whole life insurance.  Increasingly I hear of situations when people have purchased the wrong insurance product or more than can be justified by their individual circumstances.  Often the the policy purchases is different from the operation of the policy purchased. 
Many of these people have a heard mentality.  They feel they should purchase what they are told others are purchasing.  Some think everyone else is in the same situation they are and in.  They also assume that everyone else did the research.
The first rule is to determine your own situation.  This includes knowing what risk you are trying to insure against.   Another aspect is knowing what assets you have available to cover that risk.  Naturally, you should consider alternatives. 
Whole life insurance combines insurance with investments.  The policy will pay a death benefit regardless of how long the policy owner lives, assuming the premiums have been paid timely.  Term life insurance does not have an investment element.  It will only pay a death benefit for a specified period. 
Many of the whole life policies will invest the investment portion of the premium in excess of insurance costs and fees.  Typically they are primarily invested in bonds.  There are policies that will allow the insured to assume the investment risk.  These policies allow the investor to pick from a fixed menu of investments.  The discussion of other types of life insurance is beyond the scope of this discussion.  
Policy holders are typically told they can have access to the investments.  Unfortunately “…typically they need to hold the policy for at least 15 or 20 years to get the kind of returns they expect.” 
Some “…say the primary negative for whole life remains in place:  It is expensive, in part because of high commissions…”
Life settlements is a vehicle many people are becoming aware of to sell life insurance policies they no longer need.  In many cases the policies did not fit their situation when they were purchased.  
There are circumstances where whole life insurance is more appropriate than term life insurance.  The point is know know what you are trying to achieve and what the alternatives are.    
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