When it comes to cash value insurance, whole life sales are picking up steam. Annual sales of whole life insurance were up 12 percent in third quarter of 2009, compared with the same period of 2008, according to LIMRA International.
By contrast, annual sales of universal life and variable universal life insurance dropped 14 percent and 64 percent, respectively, over the same period. And term insurance sales, after several years of strong growth, have been flat.
Not only are sales of whole life strong, but the face amount, or death benefit, purchased is 8 percent higher than a year ago. Meanwhile, those buying universal life and variable universal life insurance are buying less coverage. This decline, which began in 2008, follows seven straight years of considerable growth in universal life, reports Ashley Durham, LIMRA senior analyst. In the wake of the 2008 financial crisis and stock market crash, she says, agents and consumers prefer the guarantees of a whole life policy.
Unlike term insurance, in which the policyholder’s premiums strictly go to purchase a death benefit for a specified term, a cash value policy routes a portion of premiums to a savings vehicle. With cash value policies, a client can borrow against the cash value at a relatively low interest rate, currently running at about 6 percent. The death benefit, however, gets reduced by the amount of any loan and accumulated interest.
With cash value policies, beneficiaries pay no federal income tax on the death benefit proceeds. If the proceeds are paid out in the form of an annuity, however, part of the monthly payments are taxed as interest income.
Whole life insurance pays interest rates that are reset annually by the insurance company based on investments on long-term fixed rate contracts. At this writing, they were running at about 5 percent. Dividends issued by mutual insurance companies that write whole life insurance can add as much as 2 percentage points to policy performance. Clients pay level premiums, and receive a fixed death benefit, guaranteed by the insurance company.
By contrast, with universal life, which pays around 4 percent, the client can make flexible premium payments, subject to certain limits. Unlike whole life, universal life policy returns are tied to short-term interest rates and periodically adjusted. The death benefit and cash value build-up can fluctuate accordingly. Variable universal life lets the client invest in a selection of investment products such as mutual funds.
“Whole life’s combination of features, such as simplicity, premium and cash value guarantees and low risk is proving to be a winning one,” Durham says.
David Woods, an insurance agent with MassMutual, is directing clients to whole life insurance because of its guarantees and cash value build-up. Whole life insurance pays a guaranteed rate of 4 percent on cash values. A conservative stance has paid off for safety-minded clients, he says. He cites MassMutual statistics that show policyholders have earned annual returns between 7 percent and 8.5 percent on their cash value policies over the past 10 years through November, 2009.
“Who wants to put their money in the stock market with variable life insurance when you can get guaranteed cash values and death benefits with whole life insurance?” he says. ”Whole life insurance (held over the years) is loaded with cash and dividends enough to pay the premiums.”
Woods, former president of the LIFE Foundation, Washington, DC, says people are backing off from buying universal and universal variable life insurance. Poor universal and universal variable life insurance investment performance has forced some policyholders to kick in extra premiums to keep their policy in force. Reason: Cash value earnings are not enough to cover the cost of insurance.
“I had someone call and say they had to put another $30,000 in premiums into their universal variable life insurance policy because the mutual funds performed poorly and they only paid the minimum premiums,” he says.
Mutual insurance companies, some of the largest providers of whole life, also may distribute dividends. Those dividends can bump returns as high as 7 percent. Life insurance cash value growth isn’t taxed. Dividends are not considered taxable income, but return of premiums, by the IRS.
Based on how the policyholder sets up the policy, dividends can be used to pay insurance premiums so that a policy is paid up in 20 years, or when the policyholder retires, say, at age 65. The dividends also may be taken in cash, reinvested in the cash value, or used to buy extra coverage.
For example, in 2009, MassMutual paid policyholders $1.23 billion in dividends, boosting whole life returns by about 200 basis points, according Paula Tremblay, MassMutual spokesperson. Of course, commissions and insurance company fees are deducted annually from policy values.
Woods says policyholders, by notifying their insurance agent, can use the cash value to help pay for a child’s higher education or as a source of retirement income. Plus, many insurers permit the cash value to be used to pay nursing home costs.
Riders are available so that premiums are waived in the event of disability. A guaranteed insurablity rider lets the policyholder increase the amount of insurance coverage. A disability income rider pays the policyholder monthly income in the event of a disability. There also are cost of living, accidental death and living benefit riders, which can be used to pay for the nursing home care of a terminally ill policyholder.
Richard Weber, president of Ethical Edge Insurance Solutions, a Pleasant Hill, CA-based consulting service, recommends whole life as part of a client’s fixed income portfolio. His research has found that the performance of whole life helps boost a portfolio’s return and reduces volatility.
“Permanent life insurance has unique characteristics that qualify it as an asset class in the consideration of combining with other portfolio assets to achieve an optimal and efficient return with the investor/insured’s risk tolerance,” says Weber’s white paper on using life insurance as an asset class. “When viewed from the perspective of maximizing retirement income, the bond/life insurance strategy produced higher retirement income than a bond asset by itself.”
There is no free lunch with whole life insurance. Whole life insurance premiums, particularly in the early years, are significantly higher than those of term insurance.
Byron J. Udell, president of AccuQuote, Wheeling, IL, says term insurance premiums run about $5 per thousand dollars of coverage. By contrast, whole life costs nearly $14 per thousand dollars of coverage.
As a result, Udell says, many financial advisors buy lower-cost term insurance and invest money that would have gone to higher whole life premiums into stocks, bonds and mutual funds instead.
“Our sales of term insurance are up 20 percent this year,” he says.