How to Find a Good Whole Life Insurance Policy

Whole life insurance is a good policy to buy if you:

• Need coverage for your entire life
• Want the payments to stay the same (called level premiums)
• Want a guaranteed return on the cash value that builds up within the policy

It’s a good idea to consult with a fee-only financial advisor to make sure whole life insurance is what you actually need. These are advisors who don’t make commissions off product sales. Although whole life insurance fits the bill for some consumers, term life insurance is sufficient for most people.

Assuming whole life is right for you, here’s how to find a good policy.

Decide on the right amount of coverage

The amount of coverage to buy will depend on what you want the policy to accomplish. A relatively small policy — $10,000, for example — may be sufficient to provide enough money to pay for a funeral. A larger policy may be necessary for other needs, such as helping fund a trust for a lifelong dependent, such as a child with special needs.

Not all insurers that offer whole life sell policies in small amounts of coverage, and those that market small policies don’t always sell large policies.

» MORE: How much life insurance do you need?

Understand different approval processes

Some whole life policies offer a simplified application process. You answer some health questions, but you don’t have to take a medical exam. Others ask no health questions and promise that you can’t be turned down.

These options are worth considering if you’d have trouble qualifying because of health problems, but they aren’t the most affordable if you’re in good health. The death benefits offered are relatively small, and the costs per $1,000 of coverage are higher than for policies that require a medical exam when you apply. In addition, policies that accept everyone don’t pay the full death benefit if you die within the first few years.

Even if you have a couple of health issues, you can generally find the best price by applying for a “fully underwritten” policy that asks health questions and requires a medical exam.

Look at the rate of return on cash value

Whole life insurance features a “cash value” savings account. A portion of your premium is invested in the account, which grows slowly on a tax-deferred basis. You can borrow against the cash value, use it to buy more coverage or surrender the policy for the cash. (The death benefit is reduced if you don’t repay the loans, and it disappears altogether if you surrender the policy.)

Whole life insurance policies guarantee a minimum growth rate on the cash value. Some policies can perform even better if they earn dividends, which are portions of the insurer’s financial surplus. Only mutual insurance companies, which are owned by policyholders rather than outside shareholders, pay dividends. Dividends aren’t guaranteed, but they are worth taking into account when you compare whole life policies.  

The life insurance company will provide a policy illustration explaining how the cash value could perform. When comparing policies, understand which parts of the illustration are guaranteed. For example, a mutual insurer will give cash value projections based on the payment of dividends, which aren’t guaranteed.

Examine extra policy features

Riders are policy additions that add coverage features, usually for an extra cost. Examples include a chronic illness rider, which lets you access some of the death benefit if you have a serious illness, and a “disability waiver of premium” rider, which lets you skip payments if you become disabled. The types and cost of riders vary by insurance company.

Check the insurer’s financial strength rating

Choose a financially strong company. Check the insurer’s financial strength rating with one of the rating companies, such as A.M. Best. This is important because a strong company has a better chance of being around decades from now to pay claims.

All of the largest life insurance companies, for example, have solid financial strength ratings.

Look at its customer service reputation

Choose a company that treats its customers well. You can look up an insurer’s complaint ratio score on the National Association of Insurance Commissioners website. The ratio is based on the number of complaints filed against the insurance company with state regulators and is adjusted for market share. The national median is 1, so a score higher than 1 means the company received a larger number of complaints for its size.

Compare prices

Get life insurance quotes for the same amount of coverage from several insurers to compare prices. You may find that rates for whole life insurance vary widely.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.

 

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