Whole Life Insurance

Question 1

What happens to the cash value of a whole life insurance policy upon death?

Answer 1

It is paid out as part of the death benefit.

Question 2

In a traditional whole policy, how does the cash value earn a return?

Answer 2

It is credited with an interest rate by the insurance company. According to Khan Academy, the growth in the cash value is retarded by high insurance company fees.

Question 3

What happens upon death if the accumulated cash benefit is actually larger than the policy death benefit?

Answer 3

The beneficiaries only receive the policy death benefit, and the insurance company keeps the excess cash value!! This is confirmed by Khan Academy and by Paeano.

Question 4

What do the premiums for term insurance and whole life insurance have in common?

Answer 4

Both are fixed over the entire life of the policy. Note that because the implied term on a whole life policy is the insured total life expectancy, the policy is priced on the expectation the death benefit will eventually be paid (unlike term, where there is a significant chance the insured will not die, and no death benefit will be paid). Premiums are also higher on whole life because they contain a savings component.

Question 5

Whole life insurance policies are typically sold with an insurance company projection of the future returns of the savings component. How accurate are these projections?

Answer 5

They are educated guesses only, and often biased to the high side to attract more buyers.

Question 6

What is a “participating” whole life policy?

Answer 6

It is a policy issued by a mutual life insurance company (I.e. one owned by the policy holders rather than stock holders). The premium adjusts each year to reflect the mortality experience and financial performance of the company. Premium is adjusted by the payment of a dividend (actually a refund of excess premium)

Question 7

Whole life insurance policies are typically sold with an insurance company projection of the future returns of the savings component. How accurate are these projections?

Answer 7

They are educated guesses only, and often biased to the high side to attract more buyers.

Question 8

What is a “participating” whole life policy?

Answer 8

It is a mutual policy that

Question 9

What are the potential advantages and disadvantages of participating whole life policies?

Answer 9

Advantages -

If your underwriting group has a relatively good mortality experience, then the premiums may be significantly cheaper than with non-participating.

Disadvantages -

IIf your underwriting group has a relatively poor mortality experience, then the premiums may be significantly more expensive than with non-participating.

Premiums vary each year, which can complicate cash flow planning

Question 10

What is a key conceptual argument against participating whole life?

Answer 10

Insurance is used to mitigate risk; by participating in the outcomes of underwriting you are introducing an element if risk into your insurance program and cash flow.

Note -

Question 11

LI agents often sell whole life insurance based on the idea that is a forced savings program, and that those who buy term won’t have the discipline to regularly invest the savings, and that they might through poor management achieve only mediocre returns. What are some good arguments against this to line of thought?

Answer 11

1. ) If those who buy term have the discipline to pay the premiums, they have the discipline to say the difference
2. ) A program of auto deductions from checking to an investment account could be set up
3. ) Mediocre returns are guaranteed by investing in a whole life policy!