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Slow and Steady Wins the Life-Insurance Race

Philip Moeller

Long derided for providing low returns and high agent commissions, traditional whole life insurance has been on a four-year roll. Its plain-vanilla sales points--permanent insurance, annual dividends, financial stability--have emerged in uncertain times as attractive virtues. With low interest rates pushing down returns across the spectrum of so-called "safe" investments, the modest returns of whole life insurance policies no longer seem so unappealing.

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For the past five years, industry researcher LIMRA reports, sales of whole life insurance policies have taken a rising share of all life insurance sales, steadily rising from 22 percent of industry sales in 2007 to 31 percent last year.

Of course, the entire life-insurance pie shrank after the recession. Premiums on new policies fell from $14.3 billion in 2007 to $11.6 billion in 2009. They have since recovered a bit, to $12.5 billion last year. Whole life sales have far outpaced overall industry gains and continued to do so this year, jumping by 10 percent in the first quarter, compared with overall life-insurance sales gains of just 3 percent.

There has long been a standing view among many financial planners that it's better to buy term insurance and invest the difference in costs between term and a cash-value insurance product. Traditionally, that cash value product was whole life insurance. These policies are designed to be held until death, and have been heavily used in estate planning and asset preservation (life insurance proceeds are generally exempt from income taxes.)

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Term insurance, by contrast, is much cheaper and provides no cash build-up. It is designed to lapse when you no longer need insurance protection, usually after 10, 15, or 20 years. Parents of young children, in particular, are advised to get large term policies so their children will be financially protected.

To make the cash-value products more appealing, the life insurance industry began in the 1980s to offer fancier cash-value products such as universal life (UL) insurance. It provides flexibility in how much money you want to put into the product both for its insurance component and its cash-accumulation features. Variable life and variable universal life (VL/VUL) products offer the additional appeal of being able to put funds into the policy that can be invested in higher-return investments, usually via mutual funds. Together, UL and VL/VUL commanded 56 percent of all life insurance sales in 2007 but have since backed off a bit, totaling 47 percent of sales last year.

Term life supporters are generally unswayed by these other products. Some argue that providing a multitude of product features just muddies the waters and makes it harder for consumers to get a clear view of their underlying choices. The more complex products may have extensive and often confusing product illustrations and a numbing array of choices. But when you strip them away, critics say, you're left with a very expensive form of life insurance and modest cash-value appreciation at best. Buy term and invest the difference remains their mantra.

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The only problem, of course, is that many consumers like the forced savings component of conservative whole life policies. Unlike their feature-laden cousins, whole life policies are relatively straightforward. "With whole life, you know what your premium will be for the entire life of the policy," says Karen Terry, LIMRA's research manager for product research.

Whole life also benefits from an ongoing flight to safety by older investors wary of getting burned by another market collapse. Many whole life policies are sold by the most financially sound life insurers. These companies tend to be mutually owned by their policyholders and not insurers with publicly traded stock. They often pay annual dividends to policyholders and do not have public stocks exposed to stock market volatility,

Term sales, by the way, perked up a bit in 2009 but otherwise have accounted for 22 to 24 percent of total life insurance premiums for the past decade.

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