How Does Term Life Insurance Work?

Term insurance is the purest form of life insurance. It's focus is on you paying a premium in return for protection - nothing more. The most basic form of term insurance is ART - Annually Renewable Term. It has a premium that goes up annually.

Unlike fire or car insurance, life insurance (mortality) costs increase with age. The reason is simple, the older a given group of people, the more of those people who die per year. Therefore, as you get older you can expect term insurance costs to rise which is why ART premiums go up each year.

Whole life insurance is an attempt to level the increasing cost of term insurance. Essentially you pay relatively more in the early years, to pay relatively less in later years (by comparison to term insurance). What is happening is that that the life insurance company is taking the extra money you are paying, over and above the cost of term insurance, and investing it ahead in order to keep costs lowere in the future.

A number of term insurance policies incorporate a pay ahead concept to level costs for a limited period of time. A 20 year term charges you more in beginning, and less later, versus an ART product. However, both policies have annually increasing term insurance costs at the end of 20 years.

In a whole life plan, the leveling concept is a lifetime objective. That is where cash values come from. Essentially cash values are created by all the extra money, plus interest earned, that you have paid the life company in the early years. The cost difference between whole life and term can be huge.

This is flat out wrong and misleading. The premium is much higher with whole life than term. If you accumulate CSV in a WL policy equal to the premiums paid over a period of time (net of taxes), what is your cost? Your cost is ZERO. You could surrender the policy and you had insurance for free over the life of the policy. If you buy a 20-year term policy and you outlive it, your cost was the premiums paid over the life of the policy. Which policy cost more?

The question as to which to buy are:

1. Do you need life insurance for your whole life? For most the answer is NO.

Do you need life insurance at all? NO. Nobody has been denied death because they didn't own life insurance. If you understand how permanent life insurance works, you may WANT it.

2. Is the company giving me a "good deal" versus buying term and investing elsewhere? In some cases the deal can be very good, when taking into account the tax deferral benefits.

Comparing WL to investing is apples and oranges. Investing involves risk of loss. There is no investment risk with a WL policy.

But generally it is a VERY BAD idea to buy a whole life policy with the plan to cash it out in the future.

I agree. Cashing out a WL policy is the worst way to access the CSV. Loans and leveraging the death benefit to gain income options in retirement is the best way to utilize a WL policy.

If a consumer wants multiple income options in retirement, they need a permanent death benefit on the shelf. If they want a risk-free account that compares very favorably return-wise with savings accounts and CDs, they should buy WL insurance. If a consumer does not want these things, they should not buy permanent WL insurance.
 
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"I don't understand your logic."

That's because there's no logic behind it. Just another person who's sat through training at a company that doesn't offer the product. Thus the product is a bad choice.

"It's arguable "

No, it's tax code. There's no argument at all. It's not what you think it should be, it is what the IRS says it is.


"Why would someone buy a whole life policy from an insurance company that doesn't pay a dividend based on company performance, ie. mutual insurance company. "

I don't know maybe you should ask the mutual company's stockholders?

(yes, I know the answer, just checking if this guy does.)

Mutual company stockholders??? You mean policy holders?

Anyway regarding previous posters comments:

I only sell mutual products. I am not sure what logic you do not follow. The point is, however, if it's not mutual, there is little point in buying whole life, you can get better returns elsewhere than a straight whole life policy. Granted the tax issue is real and can be a benefit for some, but life insurance is not the only way to get tax advantages. I was leaving the tax issue out of the equation and speaking strictly about returns. Ultimately your contribution will match your face value, but some policies maturation until 121 years old, so unlikely contributions will match face. Furthermore with an outperforming company dividends that can be put towards future premiums, there are over a half-dozen ways to apply dividends to your policy with my mutual company and one can increase the face value. SO you can in fact raise the face value via paid up additions from dividend reimbursements.
 
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Someone has been drinking the mutual soup again.
Having contributions match the face is a bad thing.
Participating policies are good in the right situation. Non-participating are good in the right situation.
Some non-participating policies also increase the death benefit.
If someone wants the highest whole-life death benefit and access to guaranteed cash value for the lowest premium, you won't beat the non participating policy with a participating one.
 
"Mutual company stockholders??? You mean policy holders?"
"(yes, I know the answer, just checking if this guy does.)"

repeat...(yes, I know the answer, just checking if this guy does.)


"It's arguable that any cash value that is accumulated is a dividend, paid as a return of excess premium paid, however not necessarily based on company performance."

"I don't understand your logic."

Your statement above isn't correct, it is not arguable that any CV accumulation is a dividend. Mutual companies pay dividends into policies, stock companies do not. They pay dividends to stockholders. They usually pay a set amount of interest declared prior to the time period. Mutual companies do not declare a set amount of dividend prior to the time period as they can vary up or down and that is why dividend projections aren't guaranteed.

"Participating policies are good in the right situation. Non-participating are good in the right situation.
Some non-participating policies also increase the death benefit."

Yup.... much to healthguy's envy... I carry a big toolbox and every product serves a purpose for somebody.
 
Cash values are NOT dividends.

Dividends ONLY become cash values if the dividends are used as premiums to PURCHASE paid-up additional life insurance which is then added to the basic policy. The additional life insurance has a cash value arguably equal to the dividend/premium paid.

A "participating" whole life policy, versus a "non-participating" policy, pays dividends. Where a company offers either a "par" or "non-par" policy, the par policy has a higher premium than the non-par policy. Dividends are generated from the excess premiums paid, over the cost of a non-par alternative, and are NOT GUARANTEED.

Cash values are actually "cash surrender values" and is the money the company will give you back, in lieu of paying the death benefit, should you quit the policy before you die.

You do not have to quit a par policy to receive a dividend.

Incidentally, it is all this complexity which causes me to believe that consumers are best served by a much simpler product, no lapse universal life. Given the premium and coverage guarantees provided by a no lapse UL policy, and the very competitive costs, consumers get a much simpler product at a much more competitive price - which is win/win.
 
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Robert, you're missing something in your explaination. It may be an understanding of what a dividend election can be or can't be.

As far as GUL as a solution to everything... run a premium offset plan (reduce the dividend so the plan pop's a year or two after projections to be sure) and you have a lifetime policy that is a far lower cost than a GUL policy which requires payment for the entire contract.

Run a comparsion sometime and you'll see it. Over time 30+ years, a popped WL is a much better value than a Gul.
 
I really thought the way it works is that if it in force at the time the insured dies it pays the face amount of the policy to the beneficiary. I guess that is way too simple of an explanation!:swoon:

BTW if it doesn't pay (lapsed) the beneficiaries are SOL!
 
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Run a comparsion sometime and you'll see it. Over time 30+ years, a popped WL is a much better value than a Gul.

Probably way to early to tell, but I wonder what % of people purchasing GUL for other than large estate planning needs will collect a payout? I suspect the vast majority will be substantially over paying for term insurance coverage.
 
"Probably way to early to tell, but I wonder what % of people purchasing GUL for other than large estate planning needs will collect a payout? I suspect the vast majority will be substantially over paying for term insurance coverage"

It all depends on the person. I've sold both ways to different people as it all depends on perspective. Some people are more willing to pay a smaller expense over a greater period of time (thus making it a larger expense) than a larger expense over a shorter period. Just depends on their pov.
Some people buy 30 year mortgages, some buy 15 year.

Some people order a pizza with 8 slices because 12 is too many to eat. ;)
 
"Mutual company stockholders??? You mean policy holders?"
"(yes, I know the answer, just checking if this guy does.)"

repeat...(yes, I know the answer, just checking if this guy does.)


"It's arguable that any cash value that is accumulated is a dividend, paid as a return of excess premium paid, however not necessarily based on company performance."

"I don't understand your logic."

Your statement above isn't correct, it is not arguable that any CV accumulation is a dividend. Mutual companies pay dividends into policies, stock companies do not. They pay dividends to stockholders. They usually pay a set amount of interest declared prior to the time period. Mutual companies do not declare a set amount of dividend prior to the time period as they can vary up or down and that is why dividend projections aren't guaranteed.

You are talking in circles. I am not stating what you accuse me of, I am simply saying ultimately any excess payments beyond the costs of insurance is similarly a dividend - since it's always made up of excess premium. What is so hard to understand? And regarding policy holder vs. shareholder thing - you know the answer?
 
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