Best Bets for Whole Life Insurance

Make sure you buy from a reputable company when you need coverage to last a lifetime. In the June issue of Kiplinger's Personal Finance magazine, Kim Lankford writes that fifty- and sixtysomethings should consider buying permanent life insurance rather than term life insurance if they still need coverage. A permanent cash-value policy, such as whole life, provides a safe place for savings, portfolio diversification, an instant line of credit and tax-free money to pay expenses after your death.
If you're buying whole life insurance, you're looking for coverage for the rest of your life. So you want to make sure you get a policy from a company that will be around for a while. 
For whole life, a mutual company is usually your best bet. As a policyholder, or member, of a mutual, your cash value earns dividends because you “participate” in the company’s investment gains and skill (or luck) in selecting risks. The big mutual companies, such as Guardian, MassMutual, New York Life and Northwestern Mutual, specialize in whole life insurance and have top credit ratings. Some former mutuals, such as MetLife and Prudential, still sell dividend-paying policies by setting aside a special reserve to pay dividends. As with any other investment, past performance is no guarantee of future results. But the way that many people compare insurance offerings -- by looking at hypothetical projections of cash values ten, 20 and 30 years ahead -- doesn’t make sense because these projections (known as illustrations) are not guaranteed. Insurers have been known to issue inflated illustrations based on impossibly optimistic projections -- and fail to deliver. Roger Blease, a pioneering insurance analyst who runs Blease Research, in Easton, Pa., says a better idea is to go back and look at similar whole life policies from different insurers to see how the total premiums paid have translated into today’s accumulated cash values. (He assumes the dividends are reinvested.)
Here are Blease’s rankings of national companies over the past 20 years, with the annual rates of return for a policy sold in 1991 to a man who was 55 years old that year: --Northwestern Mutual, 4.44% --New York Life, 3.37% --Thrivent, 3.20% --MassMutual, 3.01% --The Guardian, 2.62%

Health insurance: Two other numbers to look at

Most people, of course, have almost no control over their health insurance:  They get what their employer provides (if they have a good job) or else they get nothing.  Whether they pick their own policy or not, the first two numbers everyone looks at are thepremium and the deductible.  Well, here are two other numbers that are at least as important.

The premium and the deductible, of course, are very important–those are the numbers that determine whether you can afford thepolicy and when it starts paying something if you get sick.

If you think of your insurance as being a sort-of prepaid medical package–you pay a monthly premium and they provide whatever care you need–then the deductible (and the co-pays) are what matter.  If you think of it as insurance though, there are two other numbers to pay close attention to:  the out-of-pocket maximum and the policy limit.

The out-of-pocket maximum

Even after you pay your deductible, your insurance only pays a percentage of your bill.  (It used to be universally 80%.  Now you often see 90% for in-network coverage and 50% for out-of-network coverage, but in policies that you buy yourself, just about any numbers can show up.)

This is all well and good as long as you don’t get seriously ill or have a bad accident.  If you do, though, even 10% of your medical care can add up fast.  An extended stay in the hospital–even a short stay in intensive care–can reach hundreds of thousands of dollars.  If that happens, your 10% plus co-pays would be in the tens of thousands of dollars–enough to ruin the finances of many households.

That’s what the out-of-pocket maximum is all about.  Once your share of the charges hits the maximum, the insurance should pay the rest.

The out-of-pocket maximum is the single most important number in determining if your insuranceis really insurance.  If your finances are such that you could pay the maximum without going bankrupt, then your insurance policy is about the size you need.  If they aren’t, then you don’t really have insurance at all–you’ve got one of those increasingly common pre-paid medical packages.  (And you’ve got a bad one–one that leaves you vulnerable to ordinary bad luck ruining your finances along with your health.)

One other thing to be aware of regarding the out-of-pocket maximum is that it often doesn’t apply to out-of-network coverage:  you not only have to pay 50% instead of 10%, but the amount you pay may not count toward the limit, leaving you on the hook for virtually unlimited expenses.

The policy limit

Just like any insurance, medical insurance has a policy limit–the most they’ll pay.  When I got my first job, $1 million was common.  Nowadays I see a lot of policies with $3 million or $5 million limits (although I’ve also seen policies with limits of just $300,000).

A policy limit is necessary for the insurance company in order to be able to calculate how much they’re on the hook for–without that information, they have no idea what premium to charge.

The policy limit doesn’t come into play very often.  Usually, insurance companies will aggressively deny coverage for expensive stuff right from the start–long before they even approach the policy limit.  But it’s always possible to argue about coverage for procedures that the insurance company doesn’t want to pay for–you have access to appeals, arbitration, lawsuits.  In the extreme, it’s even possible to get the legislature involved, passing laws that require insurance companies to pay for certain things.  That’s not true about the policy limit.  Just like with other kinds of insurance, once you hit the policy limit, the insurance company has no obligation to pay any more money.

If your health insurance is to be real insurance–the kind that protects your finances from being ruined by bad luck–then you’ll want to pay special attention to the out-of-pocket maximum and the policy limit.  Appropriate amounts for those values will matter far more than the deductibles, co-pays, or even the premiums.

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