Whole Life’s New Lease: Beating Financial Crisis!
by Efin Advisor | February 27, 2010
This is NOT your father’s, or your grandfather’s, Whole Life Insurance, says The Wall Street Journal. The old gray mare of life insurance — whole-life insurance — was “a shining star during the financial crisis.”
“Thanks to conservative investments in bonds, whole life—and its cousin, universal life—delivered positive returns during the financial crisis,” reports the financial news beacon.
But before you ride off with a new policy, realize that whole life is a horse of a different oolor compared to term life insurance. Because it is a permanent, long-term, investment-oriented account, new buyers will typically face stiff start-up costs and up-front commissions that soak up most of the first-year’s premium, well before the policy’s investment performance gets growing.
Term life is still the “default recommendation” for most consumers, particularly those on tight budgets, remarked James Hunt, an actuary with the Consumer Federation of America.
Under a whole-life or universal-life policy, the insurer deposits your premium, less insurance costs and other expenses, into a “cash value” account. Insurers typically promise minimum interest payments of 3% to 4%.
Investment gains are tax-deferred, and you are able to withdraw tax-free much or all of what you put into the policy. The policies are a good way for many people who have maxed out contributions to 401(k)s and other tax-advantaged plans to save for a variety of purposes
Over 20 years, Mr. Hunt says, the annual investment return on whole-life policies from the best insurers approaches a tax-deferred 4.5% (tax-free if held until death), after adjusting for the value of the insurance and assuming dividend schedules don’t continue to decrease.
It makes a difference where you buy your policy. Look for a company known for both low annual costs and solid investment performance. Efinancial can help you compare whole life features from several companies.
The all-important point is that whole life’s performance edge plays out over decades, so don’t purchase it if you aren’t confident you can stick with it.
Americans have long been accused of being rotten savers, never putting enough money into savings unless they are forced to. I find whole life insurance is a great way to set money aside while gaining lie insurance protection.
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Thank goodness something survived the financial downturn. My stock market investments did not!
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So long as whole life insurance companies make sound, conservative investments, they deserve to outperform high-flying risk takers. Whole life insurance may experience a revival as a safe and sane investment vehicle.
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