Adding whole life insurance to your financial plan is a big step (and a smart one). It can be the cornerstone of a strong financial plan. But, for certain, whole life insurance is a long-term financial product that you may have for many decades. You’ll want to make sure you know how to find the best whole life insurance policy before you begin your search.
Whole life insurance differs from term life insurance because, in addition to offering a death benefit, whole life insurance accumulates cash value on a tax-advantaged basis. The cash value is guaranteed to grow and never decline in value. That makes whole life insurance one of the most flexible financial products you can own, providing a unique way to reach many different financial goals throughout your life.
When you’re considering whole life insurance, you want to find a policy that will offer you the best long-term value. These questions can help you find the best whole life insurance policy.
IS THE INSURANCE COMPANY FINANCIALLY STRONG?
This is a fundamental question because you’re likely to have your whole life insurance policy for many decades – you want the company to be around for many decades, as well. The company you get your policy from is making a financial promise to you and your loved ones that may not fully pay out for a very long time, which means you want to find companies with a long track record of financial strength. The oldest policy on the books at Northwestern Mutual, for example, was issued more than 90 years ago.
There are four financial ratings companies that provide independent review of the financial strength of all sorts of corporations. You want to make sure any company you choose has high financial strength ratings.
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WHAT’S THE COMPANY’S CORPORATE STRUCTURE?
You’re probably familiar with the differences between public and private companies. But in the financial world there’s another structure: a mutual company (yes, Northwestern Mutual is one). In a mutual company the policyowners, or clients, own the company. There are no shareholders, and there’s no outside owner who wants a cut of profits. The only people who get a cut of the profits at a mutual company are the clients of the company. In addition, the CEO isn’t worried about goosing the next quarterly earnings report to look good for shareholders on Wall Street. A mutual structure allows the company to focus on the long-term financial health rather than short-term profit, which ultimately benefits the clients.
WHAT’S THE COMPANY’S HISTORY OF PAYING DIVIDENDS?
About that cut of the profits ... when a mutual insurance company makes more money than it expects in a given year, it can choose to pay a dividend. When you have a whole life insurance policy, you could take the dividend as cash, use it to reduce your premium or you can add it to your insurance, which increases your death benefit and cash value. When you use your dividend to grow your cash value, it can grow the value of your policy faster through the “magic” of compounding. Every year, you’ll earn a dividend (if it’s paid) on the amount that you reinvested. Dividends aren’t guaranteed, but through booming economies, recessions and even the Great Depression, Northwestern Mutual has paid one every year since 1872.
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One note about dividends. You’ll probably hear about a dividend interest rate or DIR. Just because one company touts a higher DIR doesn’t mean you’ll get a larger dividend. That’s because DIR is only one of three components that impact the amount of your dividend (the other two being the company’s mortality and expense charges). A company that pays a higher DIR may pay a lower dividend if its mortality and expense charges are higher than the charges from a company with a lower DIR. It’s a good idea to ask about all three components.
Here’s how it works: Once your policy is in place, at the start of subsequent years you will have cash value. The company then adds your premium (the amount you pay for your insurance) for the year. Then the company subtracts a charge for mortality (to pay death claims) and expense (the cost to run the company) from the value. Once all that happens, you have a new cash value. Let's say it's $10,000. You earn interest on that cash value at the DIR. So, if you have $10,000 in cash value and the company has a 5 percent DIR, you are credited $500 and end the year with $10,500. Any amount that’s more than the guaranteed cash value is your dividend.
When you really dig into these questions and look at all three components of a whole life insurance dividend, you will start to get a sense of the long-term value a life insurance company can provide, which, in the end, will lead you to the best whole life insurance policy. If you’d like to speak to someone about Northwestern Mutual Whole Life Insurance, one of our financial advisors would be happy to help answer these and other questions you may have.