How to Find the Best Whole Life Insurance Policy: 3 Questions to Ask

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

If you’re shopping for whole life insurance, you probably know about the benefits it offers. Unlike term insurance, which provides coverage for a limited period of time, whole life insurance is lifetime financial protection with a cash component that can help you grow your money on a tax-advantaged basis over time. Your cash value is guaranteed to grow over time. With whole life insurance, you can protect your family while building a cash resource that you can use to supplement your retirement income or accomplish different financial goals throughout your life.

So, when you’re looking for 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.

1. Is the life 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 agencies, A.M. Best, Fitch, Moody’s and S&P. They provide an independent review of the financial strength of all sorts of corporations. Each agency uses their own scale. For example, ratings could generally range from A (the best) to D (the worst), based on a company’s debt, cash reserves, financial stability, default risk and other factors. If you have a choice between a life insurance company with an A rating and one with a C rating, it’s better to purchase a policy from the company with the best rating. So, you want to make sure any company you choose has high financial strength ratings.

2. 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 policyowners 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 policyowners.

3. What’s the company’s history of paying dividends?

Typically, when a mutual insurance company makes more money than it expects in a given year, it can choose to pay a dividend. Northwestern Mutual has long been known for its industry-leading dividends on whole life insurance policies. While dividends aren’t guaranteed, through booming economies, recessions and even the Great Depression, Northwestern Mutual has paid a dividend every year since 1872.

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 to increase 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 you reinvested.

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.

Whole life insurance riders

Adding optional whole life insurance riders allow you to customize your policy to meet your specific needs. A life insurance rider is an optional benefit that you can add to a policy. Some common riders include:

• Waiver of Premium. With this benefit, if you ever become totally disabled, the company will pay your life insurance premiums for you.

• Additional Purchase Benefit. This benefit allows you to buy additional insurance at set points in the future without having to take an additional health exam. This can provide peace of mind that you will be able to add to your insurance, even if you were to get sick in the future.

The long-term value of whole life insurance

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. Your financial advisor would be happy to help answer these and other questions you may have. Your advisor can also show you how whole life insurance can work with other parts of your financial plan—including your investments—to help you reach better outcomes.