Have you ever tried to read a life insurance illustration? Often times they are so complicated that only a seasoned agent can understand them. They have all the disclaimers on them about returns and typically you will see at least two columns of projections.
One column will be the guaranteed column, which will be the worst case scenario. The other column is the assumption column. This is usually based on the companies current dividend scale or some type of hypothetical return. It is important to look at what guarantees are built in and to look at the companies historical results. If you have a dividend paying whole life product, the dividends will go up and down. The dividend is based on the companies success and the success will obviously fluctuate over a long period of time. Most good mutual companies have never missed a dividend, but the amount of the dividend is the key. If you are talking about a universal life, there is a bottom floor interest rate or return level in one column. Many plans might guarantee like 3 or 4 percent as a worst case scenario. The other side will be some hypothetical interest rate or market return. This like the dividend is a total guess based on some historical data and future projections.
The key to reading an illustration is that it will give you some rough parameters. Just remember that it will never play out exactly as illustrated.
One great feature on whole life insurance is the premium offset option. This is where the dividend on a whole life policy becomes large enough to cover the full amount of the premium. This in turn gives the policy owner the option to stop paying the premium and let the dividend cover it. It is not guaranteed that the dividend will remain large enough to cover the premium forever, but often it will be the case.
The premium offset is also known in the insurance world as a paid up policy. We usually will illustrate that for our whole life clients when they are buying a policy or if they want to see where there policy stands. Ask your agent for an in-force policy illustration, to see the status of your policy. While stopping paying the premiums may seem like a dream come true, it is often not nearly as beneficial as continuing to pay the premium. For example, if the policy has been going for 15 years, everytime you make a premium payment the cash value jumps. I have seen policies that actually have a dividend which is many multiples of the premium.
The death benefit in a whole life policy over time will typically grow as well if you select the paid up dividend option. If you do premium offset the policy, it tends to level off the death benefit. I think a lot of people are just happy to not have to pay premium anymore. Both options are good and they are a couple reasons why whole life is so popular.
