WhyWholeLife.com

Permanent Life: The often maligned, seldom understood industry stalwart endures

by Clifford P. Kitchen, CLU, ChFC, CFP, CFA, MSFS

Cliff Kitchen is an analyst for the Guardian Life Insurance Company of America, New York, N.Y. He can be reached at cliff_kitchen@glic.com.

In our market-driven society, people face wildly competing choices every day in deciding how to spend a dollar. New shoes? Kitchen remodel? College savings plans for the kids? A vacation in the Bahamas?

Consumers often turn to the popular financial media for help in managing their money. Newspapers, magazines, and Web sites all play an important role in educating the public on matters of health and wealth. But do you want your clients to live by the maxims of personal finance reporters? Probably not. One of the satisfactions of being a financial advisor is you’re able to help clients see beyond catchy messages and taglines. You can help them discover the truth about how to secure their financial futures, particularly when it comes to life insurance.

The rise of term insurance

One of the more popular media bromides with regard to life insurance is to “buy term and invest the difference.” People should purchase term life insurance, the thinking goes, and invest what they would have otherwise spent for a permanent policy in alternative vehicles such as mutual funds. This financial strategy became popular in the 1980s, when interest rates soared into double digits.

It has since become commonplace for consumers to buy term life insurance policies. Whether they actually “invest the difference” is doubtful. But when it comes to life insurance, many have concluded that cheaper is better. The same cost-benefit analysis would have a hard time succeeding in relation to other products, such as cars. Most people would still find significant differences between a Lexus, a Chevy, and Yugo.

Nevertheless, term insurance has found its place in the market. It is a welcome product for those who want to provide temporary financial protection to their families but don’t quite have the cash flow to fund a permanent life insurance policy such as whole, universal, or variable universal life.

Permanent insurance endures

Whole life insurance used to be the only form of permanent cash-value life insurance available. It emerged in 1913, when Congress established the Federal Income Tax. Lawmakers vested permanent life insurance with benefits for “the well-being of widows and orphans.” In this generation, we add “widowers” to the list of beneficiaries, as spouses today rely on each other in equal measure to earn a living for the family.

Three advantages were accorded to permanent life insurance from the beginning: a tax-free death benefit (true for all types of life insurance), no taxation on the build-up of the cash value inside the policy, and the ability of consumers to tap the cash value of a contract on a tax-favorable basis. This unique combination of benefits provides a powerful reason for anyone to consider adding a permanent life insurance policy to his or her financial portfolio.

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Whole life insurance is more expensive than term,
but it comes with a different value proposition.
Consumers buy a “sure thing” with whole life.
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That message has not been entirely lost on consumers. Even in today’s economic environment, where term insurance holds broad appeal for its simplicity and low cost, according to a recent LIMRA report whole life single-handedly accounts form more than 20 percent of industry-wide life insurance sales. Since the broad de-mutualization of the life insurance industry in the 1990s, fewer companies are promoting whole life insurance these days, but that doesn’t mean it should be written off.

Whole life insurance is more expensive than term, but it comes with a different value proposition. Consumers buy a “sure thing” with whole life. It comes with a lifetime guarantee: a guaranteed level premium, a guaranteed schedule of cash values, and a guaranteed face amount upon either the death of the policyholder or maturity of the contract.

Consumers who purchase from a dividend-paying mutual insurance company stand to benefit greatly, especially if they apply the funds toward paid-up additional insurance to offset the effects of inflation. Their death benefit can grow far beyond its originally scheduled value. Their personal “balance sheet” never suddenly drops in value because a term policy expired.

New products, old needs

New types of life insurance have emerged to bridge the different advantages of term and whole life. Variable universal life, for example, is a form of permanent life insurance that mimics a buy-term-and-invest-the-difference strategy by giving consumers control over the investment portion of the contract. Return-of-premium term insurance has also entered the market and is growing in popularity because people like the idea of getting their money back at the end of the contract term.

Each client’s needs are unique. Financial advisors must have the freedom to offer whatever type of coverage is required to satisfy a client’s situation. A key purpose of insurance, after all, is to protect people from devastating economic loss. Advisors should help clients find whatever products, term or permanent, work to protect their financial assets, meet their goals and insure their human life value.

But consumers are exposed to many unanticipated financial risks in today’s economy. Pension plans are failing. Housing markets are erratic. Risk has a way of emerging suddenly and unexpectedly. In such an environment, many consumers may particularly appreciate the guarantees offered in a tried-and-true product like whole life insurance, especially from an established mutual insurance company that pays dividends each year.

In concert with other savings and investment plans, permanent life insurance helps provide a “synergy” effect. Its presence on the family balance sheet helps people maximize their wealth, including retirement income. A consumer’s ability to draw upon a policy’s cash value, either as a loan or an outright withdrawal of dividends, provides financial peace of mind. It enables people to achieve their life goals with less risk, and it fosters a sense of well-being and security.

While the media is fascinated with the idea of buying term insurance and investing the rest, the fact of the matter is that most reporters are adept at communicating and simplifying complex information, but many, if not most reporters, don’t have the in-depth knowledge of financial professionals. For some clients it will be best to rent their coverage with a term policy, but for many others it will be better to own their policies with permanent coverage. It is our role as advisors to help consumers select the products that are best suited to fit their needs.

Copyright © 1995-2006 JonHope Publishing Company, Inc.

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