Whole Life Insurance… Do You Love It Or Leave It?


These policies can be affected by low interest rates. These are three reasons to review your policy now with an in-force illustration by the carrier.

There are many benefits to whole life insurance. A guaranteed savings account, also known as cash value, is available. Long-term protection for death benefits is also available with whole life. There are many reasons to buy a whole-life policy. However, current low interest rates make it difficult for whole-life policyowners.

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Reason #1: Policy dividends are not at the best of times because interest rates are lower

While lower interest rates might be a good thing for some businesses, they are generally not good news for insurance companies. Low interest rates can adversely affect policy loans and whole-life dividends. An annual dividend is a return on policyowners’ premiums. Although they cannot be guaranteed, they are essential for the long-term performance of a whole-life policy. Dividends can be reinvested in cash value to increase the savings account. In most cases, the dividends are sufficient to cover the future premium after 15-18 years. The policy owner doesn’t need to make additional payments and can have a policy that is “paid up” for life. It depends on how the dividend performs in the future.

Lower interest rates can mean lower dividends for policyowners. Because insurers tend to invest large amounts of policy premiums in conservative fixed-income assets, this is why they can pay lower dividends. Low interest rates mean that fixed income investments yield less and insurers are able to earn less money. In addition, they have less credit for dividends. Whole life policy owners who receive low dividends may end up having to contribute more money than they originally anticipated. It is possible that the dividend received may not be sufficient to “pay-up” the policy.

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Reason #2: Policy loans are not best if there is a lower interest rate

Whole life policyowners have the option to borrow cash from their cash value while still alive. The insurance company charges interest for the loan. Because dividends and loan rates were high, this was not an issue in the past. Insurance companies are now looking for other income sources, as they are losing more on their bond portfolios. Some insurance companies are increasing the interest rates they charge policyowners. One large insurance company recently increased their loan borrowing rate by 5% from 3.5% to 5.5%. Policyowners who have an outstanding loan on their contracts will incur an additional cost, which will affect the cash value. This could mean that you may end up paying more than you originally anticipated.

Reason #3: Your goals might have changed

A 60-year-old client of mine no longer required whole life insurance death benefit protection. His children were grown and the mortgage was paid. Long-term care insurance and retirement income were more important to him. We asked the insurance company to provide a quote for his whole-life policy. They projected that he would need to pay more premium. The policy was not paid up because the dividend was insufficient. It was time to look at other options.

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What can you do instead?

Requesting an in-force illustration of the carrier is a good place to start. In-force illustrations project the cash value as well as death benefit values. It also indicates how long you will need to finance the policy. Stress testing the in-force illustration is done by using a lower dividend rate than the current one. You should evaluate whether the policy is still worth funding if it requires several premium payments to get to “paid up” status. You might consider other options.

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Other options

Policyowners who are concerned about the length of their whole-life policy payments can have many options. The insurance company may reduce the death benefit to lower premiums, reduce insurance costs and reduce premium commitment.

Sometimes, a new policy is a good idea. My 60-year-old client would have wanted to keep his life insurance and pay it off. No more premiums are required. This is possible due to the fact that newer variable universal and indexed universal policies offer better death benefit guarantees than in the past.