If you’re looking for cheap life insurance, whole life insurance probably isn’t your best bet. During the first several years your whole life (also called permanent life) insurance policy is in effect, your premiums are going to be significantly higher than they would be for a term life insurance policy. With whole life, the theory is that you overpay in the early years and part of that extra cost is put in reserve by your insurer to accrue tax-deferred interest – the cash value of your whole life insurance policy. By contrast, with a term policy you pay a set premium for the duration of the policy, but because it has no cash value, premiums are typically much lower. But as we’re fond of saying, price should never be the sole determining factor for any insurance purchase.
While financial analysts may debate the investment merits of whole life insurance, there are just three circumstances that make it worthy of consideration.
• You or anyone in your family has major health-related problems. Whole life insurance policies often allow you to add to your coverage without requiring that you or your family member submit to additional medical tests.
• If you have a dependent child with a permanent disability such as Down Syndrome or Cerebral Palsy, your whole life insurance policy can ensure that he or she is financially provided for after your death.
• If you have a favorite charity, cause or institution you want to endow, your whole life insurance premiums could qualify as an income or estate tax deduction. Consult a tax attorney for the particulars.
If none of these circumstances applies to you but you’re still attracted to the cash value aspect of whole life, understand that this is a long-term proposition. Most whole life insurance policies take 12 to 15 years to accrue significant cash value. Cash-in early (aka surrender in insurance lingo) and you can kiss every penny you’ve paid in goodbye. Worse, if you later decide that you still need life insurance coverage, you may face higher premiums because you’re older, and you’ll undoubtedly have to go through medical screening again.
Because this is a 20- to 30-year relationship with your insurance company, when looking for whole life insurance quotes, definitely investigate the financial health of your prospective providers. You can do this easily online at A.M. Best and similar firms that rank the financial standing and services of the insurance industry. You’re looking for a minimum A rating.