Leonard Robbins

Whole Life Insurance Ripoff?



Posted: Tuesday, April 13, 2010

by Leonard Robbins
LifeNet Insurance Solutions

This article is addressed to those of you who own whole life insurance coverage purchased many years ago, or are looking for lower cost "permanent" coverage today.

First, a bit of background; up until the late 1970's, whole life insurance was the only type of permanent life insurance available. It was designed to endow at age 100 which means the cash value and the death benefit would be identical at that age. The only alternative was term life which is designed to last a specific period of time, and generally had much lower premiums.

Whole life policies allow the owner to "borrow" part or all of the cash within a policy at low interest rates. However, most owners of whole life policies do not realize that borrowing cash from a policy reduces the death benefit by that amount. In addition, the majority of whole life policies currently in force do NOT pay the death benefit plus the cash value at death. The cash value stays with the insurance company and reduces their risk as the insured gets older.

In the late 1970's inflation and other factors caused interest rates to skyrocket. Imagine being able to borrow from you insurance company at 2- 3%, and transfer that cash to a relatively risk free money market fund yielding 15-17%! Suddenly, the insurance companies had a problem. Their answer was universal life insurance. This new type of coverage is much more flexible and pays higher interest on accumulated funds. Today universal life insurance accounts for the majority of permanent life insurance policies.

Now, the news you can use!

About five years ago the insurance industry developed a truly consumer friendly type of permanent insurance, and within months it became the choice of most people, and for good reason. This policy guarantees both premium cost and death benefit for the insured's lifetime.

This accomplishes some very positive things. First, it lowers the policy premium because only "pure protection" is being purchased. There generally is no cash accumulation. Secondly, it allows the consumer to compare prices between policies without needing an advanced degree in mathematics.

Now, let's look at how this policy can be used for your benefit, even if you already own one or more whole life policies.

If you have a policy with cash value, you can transfer those funds from one policy to another without paying any current tax. This is known as an IRS sec. 1035 exchange, and has the effect of reducing the level premiums on the new policy for the life of the insured.

As with any changes to your life insurance, individual circumstances should dictate a course of action best suited to your needs. This information is designed to inform you of one potential benefit of guaranteed premium universal life insurance.

Consider contacting an independent agent, one that represents many top rated life insurance companies, and insist on seeing a comparison of carriers and premiums if that is appropriate in your situation.

Leonard Robbins is a Washington life insurance agent, and has written additional articles that can help you choose the best policy for your current and future needs.
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