If you are shopping for permanent life insurance, you’re buying “for keeps,” as the expression goes. Life insurance isn’t like a pair of sneakers, a phone or a car that you might own for a few years before upgrading. And if you’re going to have life insurance for the rest of your life, you want to choose the best whole life insurance company!
And when it comes to picking a life insurance company, there are “things that matter” and “things that really DON’T matter. We’ll break down that distinction to help you prioritize (even though you may still have a preference).
Let’s start with the important stuff!
What to look for when choosing a life insurance company.
#1: The company pays dividends.
Dividend-paying life insurance is usually whole life insurance from a mutual company. Some of the better-known mutual insurance companies include Guardian, MassMutual and New York life, to name a few, but there are many. (MetLife is an exception… they have demutualized but still pay a small dividend.)
Whole life insurance that pays dividends is also known as “participating life insurance,” or a “participating policy contract.” That simply means that the policy owners “participate” in sharing in the profits of the insurance company.
A participating policy is a whole life policy that pays dividends. Dividends have been historically reliable, but are not guaranteed. Watch out for companies that offer whole life but don’t pay dividends! This is unusual but it does happen.
There is an important benefit to life insurance dividends which dividend-paying stocks don’t provide. Once dividends are paid… you’ll have a new floor for all future guaranteed cash value increases!
#2: The company has a long, solid history.
When it comes to life insurance, we believe that longevity of the company matters! If you want a product guaranteed to last for decades to come, we suggest you purchase it from a company that has been around for at least that long!
Many of us can expect to live to 100—and possibly well beyond 100. Many whole life companies have been paying dividends well beyond 100 years, and we think that’s a pretty good measure. (Dividends are not guaranteed, although most mutual companies have paid profits in the form of dividends for many decades, even centuries!)
#3: It is a mutual (not stock) company
We work with mutual companies because they work for the best interests of their policyholders, who collectively own the company. Participating mutual life insurance companies are legally obligated to pay out their profits to policyholders in the form of dividends—a valuable benefit!
Stock companies have policyholders who are their customers, but their objective is to make a profit for company stockholders. Your best interest as a policyholder is not necessarily their top priority.
While most companies are either mutual or stock companies, there are also mutual holding companies (a hybrid that generally exists when a company is in the process of demutualization) and fraternal companies that operate for the benefit of their members, often part of a certain church, religion, or other groups of people.
#4: It offers the type of policy and terms you desire
Such terms might include a single pay whole life policy, which is not offered by most insurance provides. (Typically, a whole life policy is designed to be paid over many years.)
Some people appreciate having flexibility with the payments on their PUA (Paid-up additions) rider. Some companies are more flexible than others. This is especially nice if your household has income and/or expenses that vary each year. You can save more on a “green year” and save less in a “lean year.”
Most whole life companies offer long term care benefit riders now. However, the fine print can vary a bit from company to company, so make sure you read it and get any questions answered.
You might also have a preference for fixed rate policy loans versus adjustable rate policy loans. The contract will determine how you will be charged for interest in the future, should you decide to borrow against your policy. The fixed rate is low right now (6% with some insurers), guaranteed for the life of the policy, which we see as the superior choice. You may be glad you locked in a guaranteed low rate for future loans!
#5: The company is highly rated.
While the financial crisis of 2008 demonstrated that rating agencies are not always reliable—especially when conflicts of interest exist—they are still an indicator of overall financial strength (or trouble). You want to only purchase insurance with companies rated “A” or better (such as AA, A++) by the rating agencies (Moody’s, A.M. Best, Fitch, and Standard & Poor’s).
We find that established mutual life insurance companies tend to have excellent credit ratings, so there are many good options. Checking ratings is just one step in choosing the best whole life insurance company for you.
#6: Policyholders aren’t suing the company.
There have been consumer warnings issued by regulators about companies that provide universal life and IUL (indexed universal life). Just Google “universal life insurance lawsuits” and you’ll find pages of information about unhappy policyholders suing their companies.
Why all the lawsuits? Sometimes universal life policy owners were misled as to how the policies would perform. Policy costs and premiums may go up unexpectedly as the insured ages, even threatening the integrity of the policy. In some cases, the insured has outlived their policy and the family is trying to recoup the many thousands paid into the policy.
The fact is, people don’t always know where to store their cash, especially when rates are low. They end up putting money in lesser life insurance products—or perhaps corporate or municipal bonds—that actually carry a lot of risk. We believe whole life insurance is a more attractive alternative for the safe, predictable portion of your portfolio!
When choosing the best whole life insurance company for you, the following considerations should be of low importance.
Over the long-term we find the following differences in policies tend to “come out in the wash,” so to speak. In other words, one policy may perform slightly better for a year or two, or in a particular circumstance, but over the long haul, the difference is negligible.
#7: The current dividend rate.
The dividend changes each year and is declared annually (if the company declares a dividend). When we have run the math comparing historic performance, mutual insurance companies that pay higher one year are likely to pay less another year.
We also notice that some companies are more aggressive in their projections while others are conservative. All in all, mutual life insurance companies tend to have very similar performance over the long run.
#8: Direct versus non-direct recognition.
“Direct vs. non-direct recognition” is a question that some of our clients have. Direct recognition policies adjust the dividends paid on a policy when there is an outstanding policy loan, non-direct recognition policies do not. Owning a direct recognition policy can affect your dividends either positively or negatively, though only by a small amount. And while there are pros and cons to either, they are fairly minor.
We agree with TheInsuranceProBlog.com’s conclusion: “When it comes down to it, one is not superior to the other. All this talk… is a game of smoke and mirrors used to keep your focus away from the really important stuff.”
The bottom line: direct or non-direct, you’ll be fine as long as you follow our advice in this article about choosing a quality company! We also recommend “Essential Questions to Ask BEFORE You Apply for Life Insurance.”
#9: The ratio of premium to paid-up additions (PUAs).
In our current economic circumstances, we have seen some changes to policies. One change is that mutual companies are being more conservative about the amount of PUAs a policy owner can pay. As a result the ratio of premium to paid-up additions has increased somewhat.
Maximizing paid-up additions can build cash value faster in the early years of a policy. However, even a policy with no paid-up additions builds cash value. It’s important to remember that premium payments also support the policy face value and cash value.
Sometimes people get the impression from information on the internet that only paid-up additions build cash value, but that is not correct. And in spite of current adjustments to policies, the insured’s age remains a primary factor in how much PUA is granted. (Higher PUAs are granted to the very young, which is a great reason to insure grandchildren!)
We can assist you with an illustration if you’d like to look at the big picture to see how you policy will grow. It’s important to look at the big picture and get your questions answered. We can also help you analyze the projected long-term gains of the policy with Truth Concepts software.
And if you would like our assistance or have questions about your finances, see what Partners for Prosperity is all about. We are insurance brokers and therefore can represent more than one insurance company. We can also assist with self-directed IRAs and other investments. Contact us to schedule an appointment, request an illustration, or simply ask a question via email. We’d love to help you choose the best whole life insurance company for you!
—By Kate Phillips and Kim Butler