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Whole life: the Swiss army knife of financial products

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Whole life provides death benefit protection, and with new riders and features, it can fulfill a variety of consumer needs all within one product, making it the Swiss Army Knife of financial products.

From coffee cups to contact lenses, most of the products we purchase today are disposable and built for quick replacement. But when it comes to life insurance, which protects the people we most cherish in life, we want and need a product that is built to last and lives up to its promise.

Whole life insurance is a fundamental product in our industry: it both protects and provides. The question is, do consumers know how truly versatile it is, and are we helping them to understand that the benefits whole life provides while clients are alive may be as valuable as when they’re gone?

Whole life is protection

However, whole life insurance, at its core, is about death benefit protection so families can maintain financial stability in the event of the loss of a head of household or primary caregiver. It helps families continue to maintain their lifestyles, live the dreams they’ve planned for and not suffer financially when they have lost so much already. And, unlike term life insurance, whole life coverage is permanent and premiums are guaranteed by the issuer never to increase.

The product also provides clients with tax-deferred cash value accumulation, which they can access during their life through loans and partial surrenders. Loans accrue interest and accessing the cash will reduce the cash value and death benefit.

Addressing chronic care needs

The good news is that we’re living longer. The bad news is that we’re more likely to need assistance with care as we age. New whole life policy riders are available at an additional cost to help people pay for the care they need, without depleting their savings.

While it’s not necessarily something we like to think about, according to a recent report on long-term care from Morningstar, nearly 70 percent of people who reach age 65 will not be able to perform two of six activities of daily living (such as eating, bathing, walking, toileting) or will suffer a debilitating disease like Alzheimer’s over the course of their lifetime. New chronic care riders allow policyholders with these permanent conditions to access the death benefit of their policy — as opposed to just the accumulated cash value — to help offset expenses such as nursing care costs, medical bills and daily living expenses.

Some rider designs pay out the chronic care benefits using an indemnity model: Once policyholders qualify, they automatically receive a set amount of funds each month or year until the distributions are exhausted, without having to worry about submitting receipts and waiting to be reimbursed by the insurer. Having an indemnity model also means the money can be used without limitation, to support a family caregiver, adapt a home or take a recovery retreat.

Another benefit of these new riders is that the consumer can qualify to access the full benefits immediately after the policy is issued without having to wait for the cash value in the policy to grow in order to take advantage of the benefit. This also avoids a risk faced by those attempting to self-insure, who may not save enough before a chronic care type event occurs.

In many cases the benefit amounts on these riders are determined at time of purchase, providing certainty to the policyholder in the amount of coverage they’ll receive in the event of a chronic care claim. Additionally, some products guarantee the rider premium for the duration of the policy, meaning the policyholder never has to worry that their premiums will increase — a fundamental aspect of whole life products.

Although Medicare, Medicaid and health insurance plans pay for some expenses, there are often significant restrictions on what they’ll fund. That leaves many consumers to pick up the tab for the remainder. According to the results of an independent study conducted in 2014 by Univita Health, the nation’s largest long-term care administrator, and commissioned by New York Life, the average cost for nursing home care in the U.S. has climbed significantly in the past five years, up 20 percent to $95,706 per year from $79,935 in 2009. That can drain savings much faster than people may imagine.

When we talk to consumers about why they buy life insurance, they often say, “To avoid burdening my family.” Very often, however, we need care that can burden our families before we pass away. Having a whole life policy with a chronic care rider allows people to lessen the financial burdens of chronic care situations. 

Diversity in retirement planning

The retirement landscape has changed. Pensions are disappearing and people are living longer and spending more time in retirement. As a result, consumers must take greater personal responsibility to save for retirement. One aspect of retirement planning is considering how taxes will affect retirement savings and income.

From a tax perspective, a retirement plan should include three key attributes: contributions that are tax-deductible; accumulation that is tax-deferred; and distributions that are tax-free.

Most traditional retirement plans, such as traditional IRAs, 401(k)s or pensions provide tax advantages now, with the understanding that taxes will be paid on distributions when taking income in retirement.

These vehicles may still make sense if a person will find himself or herself in a different tax bracket upon retirement. However, since tax rates are near historic lows, deferring taxes now only to pay them in the future may end up costing more if tax rates increase.

Alternatively, including a whole life insurance policy as part of a retirement plan may help to reduce future tax burdens and take advantage of today’s historically low tax rates. In addition to valuable death benefit protection (if properly structured) and if the client’s needs change, withdrawals from a whole life policy can provide tax-free income in retirement.

Much like a Roth IRA, the customer funds the policy with after-tax money so that he or she can enjoy tax advantages in retirement.

Rider options

Disability Waiver of Premium riders generally waive the premiums due on a whole life insurance policy if an individual is disabled and unable to work. For a separate charge, this rider enables you to continue to provide death benefit protection for loved ones in the event of a total disability, subject to individual policy provisions.

More importantly, the rider ensures that the whole life policy will continue to grow.

This means that clients can still achieve their accumulation and protection goals even while disabled and unable to earn income. Think about it: What other financial vehicle provides an option that will allow for continued growth as planned if you are not able to fund it?

Terminal illness riders help protect individuals if they become terminally ill by allowing them to accelerate the death benefit while alive, generally income tax-free, to help pay for expenses associated with the illness or make the most of the time left. Much like the indemnity feature of some of the long-term care riders, the funds can be used for any purpose, whether to cover medical costs, pay for experimental treatment or to spend on their loved ones.

Tried and true for even more of life’s stages

While whole life insurance was first introduced more than 250 years ago, the product is more relevant and powerful today than ever before. It remains a core protection product, while continuing to evolve and serve people’s growing needs.

Its versatility makes it a cornerstone of anyone’s financial plan; and new riders allow policyholders to use their policies in new and different ways, based on individual needs. Whole life insurance is a product to count on for the long term — a client’s whole life.

See also:

10 things to know about whole life insurance