One of the most common questions I have received has been “When should clients consider a whole life insurance policy versus a term life insurance policy?”.
My first reaction is that I know of no widow or child that received a death benefit and thought “Did Mom or Dad get the whole life or term life?” The first step is to always have some type of life insurance protection in place. However, I understand that consumers want to make sure they are making a solid financial decision so I decided to acknowledge the top simple reasons clients go with whole life insurance.
1. They want the permanent death benefit
They understand their own mortality. They want to leave their loved ones an inheritance or they have long term debt that needs to be paid off. They simply don’t have a crystal ball to know their financial situation at their time of death and they want to ensure a policy is in force for their loved ones when they pass.
2. They want a low risk way to build wealth
Not all whole life insurance programs are equal. Some are designed for long term death benefit performance and some are designed to accumulate cash value efficiently. Depending on your goals you should consult with a life insurance specialist to design a policy custom to your needs. Although the rate of returns are not comparable to the stock market it is a low risk strategy with a respectable rate of return given the low level of risk.
3. They want strong guarantees
A life insurance policy is a contract with a life insurance company. Many companies are highly capitalized and have a track record of performance for many decades. With a whole life insurance contract the company is able to guarantee a lifetime death benefit even if the insured develops health conditions later in life. As long as premiums are paid and no exclusions apply (i.e suicide) then the death benefit is guaranteed to be there for their families. Additionally, the cash value growth is guaranteed every year and some policies can receive a dividend from the issuing insurance company but the dividend is not guaranteed.
4. They like the living benefits of whole life insurance
Some of the living benefits are tax deferred growth on cash value, creditor and lawsuit protection (varies by state), access to liquid cash in case of emergency via policy loan, funding or college or a business, or cash value surrender (withdrawal) as a retirement supplement.
5. They don’t want to burden their loved ones with their final expenses
Clients who buy whole life insurance want to make sure that their burial expenses are not a burden on family members or friends. They prefer whole life to term life insurance because their term could expire before their death.
6. Their families will owe estate taxes
This is for affluent clients but essentially if an estate tax would be owed to the government the family can utilize the death benefit to pay taxes instead of liquidating the estate’s investments, property, or business interests. This is obviously heavy on tax planning and clients should consult an accountant or tax professional before using this strategy as situations can be complex.
7. They want to pass on a business or give their family time to sell the business upon their death
In the case of a business owner’s death, the family might not have interest or skill to continue the business or they want to sell to a qualified buyer. However, selling a business is complex and can take months or years. In the meantime the business will still need capital to operate and the whole life insurance death benefit could be a helpful resource to provide the family time to find and negotiate with a buyer.
8. They want to make a charitable donation
These clients understand they have a purpose in life larger than themselves. Whether it be their local church, an alumni association, or other charity the client wants to make one last contribution so that their charity can make the world a better place.