By M.P. MCQUEEN(See Correction & Amplification below.)
As the economy sinks, a growing number of Americans are turning to a stodgy financial product favored by their parents and grandparents: whole-life insurance.
These policies' steady, tax-deferred returns, many now in the 4% to 5.5% range or more over 20 years, look enticing after the 40%-plus declines in the stock market over the past year and a half. Indeed, investor angst is helping insurance agents sell whole-life insurance.
Whole-life policies are "permanent" policies that include a guaranteed savings component, as well as a death benefit. They differ from less-expensive term-life insurance, which provides only a death benefit in return for premiums paid over a specific period and offers no cash buildup.
But potential buyers of whole-life insurance should be aware of its downsides. Because it isn't a transparent product, it's difficult to assess what its actual returns are. Part of the policy's returns may also include a partial return of premiums paid. In other words, you may be getting some of your own money back.
Though many risk-averse consumers are attracted to whole life, the insurance presents its own set of risks. A whole-life policy can bind the owner to the fate of a single company for decades, with steep costs to get out early. Some insurers now struggling looked very strong as recently as two years ago.
For all these reasons, many financial advisers recommend against purchasing whole-life insurance primarily as an investment vehicle.
Additionally, whole-life policies often must be held for 20 years to realize any actual gains because of stiff charges loaded in the early years of the policy -- including commissions and administrative fees. Yet 44% of whole-life policies lapse in the first 10 years, according to Limra, the insurance industry research group -- which means that policies terminate after people stop paying premiums.
What Price Whole Life?Sales of whole-life insurance, which offers buyers a guaranteed return, are rising as the economy falters.
- The policies have a low market risk, but give holders exposure to an insurer's potential troubles.
- Returns can be distorted by the complex structure of these policies.
- Whole is not suitable for short-term use.
The insurance industry, for its part, says whole life fills a key need for consumers when the stock market and other investments are hurting. "Life insurance offers the combination of death protection and some elements of accumulation," says Robert Chappell, the chairman, president and CEO of Penn Mutual Life Insurance Co. "It doesn't give you high return opportunities, but it gives you a steady source of accumulation along with life insurance protection."
Lynne Mazin, a 33-years-old bond seller in Larchmont, N.Y., recently purchased a whole-life policy for more than $200,000 from New York Life Insurance Co. Ms. Mazin, who is single, says she made the purchase knowing that many financial experts don't recommend life insurance for individuals without dependents, though she helps support her parents and a brother.
"I know I'm young and it is not traditional, and it is against some investment advisers' recommendations," says Ms. Mazin. "But we are in a new world in terms of overall market conditions." She also owns stocks and other assets.
Whole-life sales have been a bright spot in an otherwise tough landscape for the life-insurance industry. Many insurers have been rocked by declines in the value of their own investments, and some insurers have seen the stock of their publicly traded parent companies tank.
First-year premiums of whole-life insurance policies rose 2% last year at a time when life-insurance premiums overall were down 7%, according to Limra.
The lion's share of sales came from mutual insurance companies, which are owned by their policyholders. At New York Life, for example, new sales of whole-life measured in first-year premiums rose 11% in 2008 over 2007. At MassMutual Financial Group, first-year premiums rose 16% and the number of whole-life policies sold increased 13% in 2008 over 2007, according to the company. New whole-life premiums were up 6% in 2008 at Northwestern Mutual Life Insurance Co.
Mutual insurance companies argue that lack of shareholder pressure helps them adhere to more-conservative, long-term investment strategies. But that alone doesn't assure every mutual company's stability or the safety of its policies. A whole-life policy may not perform as expected if insurers' own investments aren't doing well.
Consumers are coming back to whole-life insurance after many years in which better returns were available in the stock market, and easy-to-understand, easy-to-buy term policies were getting cheaper.
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