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Buy whole life insurance the smart way ...

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Whole life insurance provides two benefits to people:
1. It pays beneficiaries upon the death of the insured.
2. It invests some of your money and slowly builds up a cash value.

Whole life insurance is the "traditional" form of life insurance. You pay the premiums for 20 years and then you're covered the rest of your life. As long as you keep paying the premiums, it doesn't stop -- unlike term insurance. It's also known as permanent life insurance.

It's important to understand that whole life is worthwhile only if you do keep paying the premiums for the entire period.

Most of your premiums for the first year go to pay the commission to the agent who sold it to you. Other expenses eat up most of the premiums you pay in the first 5 years.
After commissions, fees and expenses, the life insurance company invests your money. Part of the premium you pay goes to cover the costs of insuring you. A certain number of policy holders do die every year, and insurance companies must pay the beneficiaries of their policies.
The rest of the investment return the life insurance company can earn from investing your premium goes toward what's called the cash surrender value. It's called that because if you did cancel the insurance policy, the company would pay you that amount of money.

Many people with cash flow problems stop paying on their life insurance policies because they seem less immediately necessary than food or the electric. They don't understand that if they don't surrender the policy, the life insurance company pays the premium for them, out of their cash surrender value.

It's possible that a considerable number of people die and the beneficiaries lose the money because they think the policy is no longer in effect because they know the owner stopped paying the premiums ... yet the insured is still covered because they'd really been paying the premiums out of their cash surrender value.

It's difficult to impossible for the average person to make an accurate comparison between whole life insurance policies.
It is possible to simply compare the premium costs for the same face value. You can say that if Company A is going to charge you $100 a month for a $50,000 face value policy and Company B is going to charge you $120 a month for a $50,000 face value policy, then Company A is cheaper.

But remember that the insurance is just one portion of the benefit you get from whole life. The other portion is forced savings.
Yet you probably don't compare the guaranteed cash surrender values. Company A make extract more expenses than Company B and therefore the cash surrender value will be less.
That's called the internal rate of return and it takes an expert to calculate.

You can however just look at the guaranteed cash surrender value at the end of the policies' 20 year lives and see which one will be worth more at the end. If Company B's policy will be worth significantly more in cash value than Company A's, you have to weigh that benefit against the additional $20 a month you're paying for the premium.

Also, you must ask whether you're buying participating or nonparticipating life insurance.

With participating life insurance, the company pays you dividends on the premiums that it invests for you. Since investment returns can and will vary over time - and future earnings are unpredictable - you just don't know how much the dividends will add up to.
Nonparticipating means that the company is not going to pay you dividends. Instead, it guarantees a higher cash surrender value (these values are listed in a table in your policy.)

Which is better? Who knows? It's impossible to say for certain because nobody can predict how much a life insurance company is going to earn from its investments in the future.

Remember that over the 20 year life of any permanent life insurance policy interest rates are going to go up and down. The stock market is going to go up and down. Sometimes a lot up, sometimes a lot down. You cannot predict the future, but before you take out any long term life insurance policy you should make sure the company is financially sound. Life insurance companies can and do go out of business.

You want to hand your money over to a company that's safe and sound.

There are various rating services that determine how financially secure life insurance companies are:

  • Moodys
  • Weiss Research/The
  • Standard & Poor's
  • Phelps
  • AM Best

The life insurance market is very competitive. Do compare quotes. Do compare final cash surrender values. Do check the company's financial ratings. The lowest rates are not the best value if the company will go out of business in 5 years.
It's difficult to make a simple, logical comparison between two or more life insurance policies. Make sure you know what to look for. And make sure the insurance company is financially sound. (don)
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