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Facts About Whole Life

Author: Dick Hartzen

Term insurance policies have always been a popular product. The premiums involved seem to make people feel that it is the ideal solution to their insurance needs. The belief is that needed coverage is given at affordable prices. There is little thought given to "initial premiums" versus "future premiums." That is one of the major flaws in this type of insurance.

Term insurance may be available for a length of time needed by the insured. The premium may even be fixed for the period chosen. A 20 year level term policy will have a fixed level premium for the entire 20 years. There is a serious problem that will arise at expiration. If there had been no options added to the policy (at additional cost) the coverage ends. Finding new insurance may be difficult. Health problems may have arisen. An occupation may not qualify for future coverage. Even the military status may enter the picture. Certain policy options might have assisted in solving the predicament if added prior.

A policy may have offered a renewability or conversion option at expiration. The required new premium would be determined and be adjusted to the attained age if either of these options were chosen. If the conversion option is chosen, the new policy must be a permanent type of coverage. This may make either of these provisions unaffordable or impracticable.
A 5, 10, 20 year term or term to 100 that offers renewability usually does not contain a full disclosure. The premiums required to continue this needed protection may prove unaffordable at the time when needed the most.

For example, a $500,000.00 annual renewable (yearly renewable) term policy may require the following annual premiums:

at age 75.....................$8,470.00 *
at age 85...................$23,932.50 *
at age 95...................$65,215.00 *

Use your imagination for the premiums due at ages 99 &100.

* The figures above are for a non-participating policy.
Some term policies operate with a decreasing death benefit. Needs that decrease over a period of time can be matched to a policy that will also decrease. The result is not having more insurance in the future than needed. It also will result in a lower premium than if level term was chosen. Even though the insurance decreases, the premium stays level for the entire term. Many of the decreasing term policies level off in the future to make coverage worthwhile.
This type of coverage should not be used for mortgage purposes without an amortization schedule that matches the mortgage. A $200,000.00 mortgage at 6% taken out in 2009 would have a balance of approximately $147,570.60 in 15 years. A straight line decreasing term policy would only provide $100,000.00 of protection at that time. A policy with a 6% amortization schedule would provide the correct amount of coverage.
Some agents mention that the coverage can be increased on a regular basis to match the mortgage balance. A forgotten fact is that to increase coverage requires insurability and an advanced age at the time of request.
Possibly, the most important negative with term insurance involves the fact that there is usually no cash value buildup. Money will not be available for emergencies or retirement. Some term policies that remain in effect for many years (usually 20 or more) build up a cash value which is used during the older and costlier years. The results at the expiration are the absence of cash value and coverage.
Illustrating a renewable term to 100 policy should include the future premium requirements. There may be two tables shown. One table is the "guaranteed table" and the other the "projected table". In reality, either table may illustrate that the policy is probably not affordable a long time before 100. Many of these policies lapse prior to age 70.
Agents often cite the reasons noted above to stress the advantages of "whole life" insurance. It is described as:

a. level premium,
b. cash value build up,
c. lifetime coverage.

It does not take an actuary to find fault with this logic.
It is important to remember that the cash value is not paid in addition to the face amount. The actual net amount at risk (insurance) on the company’s part being provided is the difference between the face amount and the cash value.
An interesting analysis would show the following:example:

$100,000.00 of whole life coverage is issued for a 35 year old male . The annual premium is $1,163.00.

year     cash value      net amount at risk     cost per $1,000.00
  1           - 0 -                   $100,000.00                    $11.63
  5         $2,043.00              $97,957.00                    $11.90
 35       $48,238.00             $51,762.00                     $22.47
 50       $78,840.00             $21,160.00                     $55.00
The first year would show an annual cost of $11.63 per $1,000.00 of the death benefit ($1,163.00 / $1,000.00). This was the original cost.

The 5th year illustrates that the $100,000.00 death benefit would be comprised of $2,043.00 (cash value) and $97,957.00 (net amount at risk). The level premium of $1,163.00 would result in a cost per $1,000.00 of $11.90 ($1,163.00 /$97,957.00). That is an increase from the original premium of $11.63. The 50th year would result in a cost per $1,000.00 of $55.00 ($1,163.00 / $21,160.00). The face amount has remained level, but the premium has increased by 372.91%. The net amount at risk has decreased by 78.84%.
Whole life insurance is an excellent policy. However, stressing the negatives with term insurance is not a fair comparison. Evidently, whole life insurance is a decreasing term policy with an increasing premium.

Copyright 2009 by Richard I Hartzen. Used with permission.

​127 South Peyton Street
Alexandria VA 22314
​phone: 800.221.7917
fax: 703.683.7556

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