Keys to comparing whole life insurance policies

Remember these seven keys:

• Premiums remain constant for the entire policy: To compare costs and prices, you must compare the mortality charges, cash values, dividends, and death benefits.
• Although one company may pay a dividend while another may not, the dividend-paying company is not necessarily the better buy: You can tell only after you get quotes.
• Take the projected cash-value earnings with a grain of salt: Companies often show you charts featuring high projected returns. Use the guaranteed return for your comparisons. Because earnings on whole life policies are tax-deferred, you must consider your after-tax return, not just the return itself when comparing the return on your policy to a return on a taxable investment. To calculate the aftertax return, you have to know your marginal tax rate (including your state income tax if applicable). If you’re in the 28 percent federal income tax bracket and the 7 percent state income tax bracket, that means that 28 + 7, or 35 percent of a taxable return on investment will be paid to the governments. By subtracting the total tax paid from the total return, you get your after-tax return. So a 10 percent taxable return actually is the same as a 6.5 percent untaxed return (35 percent of 10 is 3.5, which, when subtracted from 10, leaves 6.5).
• Put extra stock into the insurance company’s rating: With term insurance, you’re only concerned that the company remains solvent during the term you purchase, but with whole life, you’re buying into the company itself. A company with a significantly lower rating may guarantee a slightly higher return, but you may want to seriously consider the lower-yielding but higher-rated company for your own peace of mind.
• Insurance is protection, not investment: If you want to purchase a whole life policy because you think it’s a good investment, think again. Many other investments such as IRAs and 401(k)s can give you a better — and still tax-deferred — return on your dollar. You may be just as well off investing your money in another taxdeferred vehicle and purchasing a lower-cost term insurance policy.
• Find out what happens if you terminate your coverage: Some insurance companies have cancellation or termination charges, while others build in administrative charges up front. Include these charges into your comparisons.