Thanks to conservative investments in bonds, whole life—and its cousin, universal life—delivered positive returns during the financial crisis. But before you sign up for a policy, beware: You will pay hefty premiums and, in most cases, a steep up-front commission that eats up your first-year premium, leaving little of it for investment.
Whole life and universal life often are best for people with plenty of money to invest beyond their 401(k)s, but only if held until death.
Both are “permanent” insurance: The policies are designed to provide a death benefit, however long you live. “Term” insurance, by contrast, protects you for a given period but builds no value. For young people, premiums for term life are much lower than for permanent insurance.
Term life is the “default recommendation” for most consumers, particularly those on tight budgets, says James Hunt, an actuary with the Consumer Federation of America.
Under a whole-life or universal-life policy, the insurer deposits your premium, less insurance costs and other expenses, into a “cash value” account. Your money is invested mostly in corporate bonds, and insurers typically promise minimum interest payments of 3% to 4%.
Investment gains are tax-deferred, and you are able to withdraw tax-free much or all of what you put into the policy. The policies are a good way for many people who have maxed out contributions to 401(k)s and other tax-advantaged plans to save for a variety of purposes before they die, says Peter Katt, a fee-only life-insurance adviser in Mattawan, Mich.
Term life gained popularity as the proliferation of mutual funds in the 1980s and 1990s expanded savings options, and “buy term and invest the difference” became a mantra.
Of course, anyone who invested the difference in stocks may still be smarting over losses from the recent market meltdown. And some wealthy taxpayers who invested directly in bonds would have had trouble matching the investment returns of a good whole-life policy after taxes.
Those in a high tax bracket “would have a hard time making term life and a bond fund work better than a good whole-life policy,” Mr. Hunt says—provided they don’t surrender the policy and incur income taxes.
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