13 Feb Retirement savings and whole life insurance

Q. Why are these financial companies selling these whole life policies as retirement supplements? I understand that there is a cash value but details were omitted to me when I purchased my policy.
— Thinking about it

A. Permanent life insurance policies such as whole life can be hard to understand.

Let’s take a look at your life insurance options to help you better understand where whole life fits in.

First, there’s term insurance, which is not a permanent policy. It has a temporary death benefit only with no value unless you die.

Premiums are very attractive for young healthy people and are typically fixed for a term period such as 20 years, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

Once the selected time period ends, rates increase so much that most people will drop coverage.

“If someone is healthy enough, they could reapply for more favorable rates,” Gaelick said. “Death benefits remain level for the term of the policy which means when you factor in inflation, the spending power of the benefit is less in the future.”

Then you have universal and variable life.

Both are typically sold as permanent plans and illustrated with level premiums using certain assumptions, Gaelick said.

He said both products are built on a term policy platform so internally, rates do increase.

“You may not see it since your premiums are `level’ but read the policy and you’ll see,” he said. “There are typically no guarantees and should your return be less than projected over a long period of time, rates can increase and accumulated values may be used to subsidize the premium increase.”

Universal life performance is based on interest rates and variable life performance is dependent on the mutual funds chosen, so values are completely subject to market risk.

Whole life is on the other end of the spectrum.

Gaelick said you can buy whole life from two different types of insurance companies — a stock or a mutual company.

Gaelick said a stock company, such as Prudential, Met Life or Equitable, has an obligation to its shareholders so the company is managed with that in mind. Profits are primarily distributed to shareholders in the form of dividends so whole life policyholders don’t benefit from dividends.

A mutual life insurance company, such as Guardian, Mass Mutual or NY Life, has no shareholders. When they make a profit, they share their profits with whole life policy holders — the “mutual” owners of the company — in the form of dividends.

“Dividends can be taken as cash or put back into the policy to increase accumulated values and benefits to avoid current taxation,” Gaelick said. “Once dividends are declared and paid, they become your guarantees and can’t be taken away.”

Values are not market risk sensitive, he said, and premiums are guaranteed level forever.

You get a guaranteed accumulation of cash value regardless of whether the company makes a profit and then you share in profits in the form of dividends above and beyond guarantees, Gaelick said.

“If you qualify and purchase the `waiver of premium’ rider and become disabled, the insurance company makes your premium deposits for you. You don’t even owe them back,” he said. “This protects the accumulation of values and increase in benefits.”

Gaelick said pure whole life policies are not investments. They are insurance with a savings element with many additional features, but they can and often are used to supplement other retirement benefits.

“There are many ways to withdraw money from a policy, each with different consequences, so it’s very important you work with an experienced broker with superior knowledge of whole life,” he said.

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This post was first published in February 2018.