Whole life insurance seems like quite a straightforward process. It ensures that you have coverage for as long as you are alive, and it guarantees premium returns, cash value generation and death benefit. Agencies that offer whole life insurance typically pay dividends each year, which can be applied to premium payments.
Although, it should be noted that the guarantees come with a high price. But, for some people, paying the high fees for the benefits is worth it. Where many people go wrong is they assume their whole life policy is a ‘set it and forget it’ insurance policy. This is not the case and things change from what you were expecting.
Let’s look at a few other common myths and misconceptions surrounding whole life insurance:
Myth No. 1: Whole Life Policies Do Not Require Constant Monitoring As A Result Of Guaranteed Returns
Changes in dividends and mortality costs (the cost of insurance) can create a significant impact on the performance of the policy. It is wise to ask for an in-force policy illustration every couple of years. By receiving an in-force illustration, you get a projection of future values generated based on current assumptions. For instance, if the existing dividend scale is smaller than the projected dividend scale, or the expense of purchasing insurance is higher than when the policy was purchased, the policy will likely not perform as expected.
Myth No: 2 Your Net Outlay Will Remain Level
This depends on whether you are using dividends to decrease your premium. In that case, the new annual outlay will likely be higher if dividends are low.
Myth No. 3: Limited Payment Periods Are Always Guaranteed
Although your policy does guarantee the maximum premium needed every year, it may not specify the number of years of required payments.
Myth No. 4: Whole Life Insurance Is an Investment or Retirement Plan
Be aware of sales ‘schemes’ that revolve around removing money out of a whole life insurance policy. You can withdraw funds from a life insurance policy but only up to the cost basis or borrow money on a tax-free basis. But, doing this will result in a decrease in overall death benefits. Also, a policy could end prior to maturity if there are too many withdrawals and policy loans and if you have not bolstered the cash value with extra premiums.
Also, ensure that the main reason you are committing to a whole life policy is that it is life insurance and not because you regard it as an investment. Although whole life policies do generate a cash value on a tax-deferred basis, their primary function is to work as insurance policies and not investments.
Policy loans Are Simply Borrowing Your Own Money And Doesn’t Affect Policy Performance.
Life insurance agencies include interest on policy loans. Insurance agencies are still required to pay dividends on the borrowed amount, but the dividends will be lesser than the dividends on the amount that is not borrowed and will generally increase more than the interest charged.