he recent economic crisis has served as a wakeup call for many Americans. Shaken by volatility in the stock market, families have taken a close look at the condition of their retirement accounts and investment portfolios and in some cases responded with a newfound appreciation for diversification and asset allocation. By moving holdings into a mix of different types of assets, consumers can follow a time-tested approach to lessening investment risk and providing an efficient balance of risk and reward.
While diversifying their investments, many Americans are also taking steps to diversify their insurance coverage. After years of following the popular pitch to “buy term and invest the difference,” consumers are seeing first-hand how market volatility can threaten a seemingly sound risk management strategy. When stocks were plunging between 2008 and 2009, “invest the difference” looked more like “lose the difference.” The idea of relying on investments to eventually provide a form of self insurance no longer looked like a sure, let alone safe, bet. In such a dramatic financial environment it’s no surprise that one of the most old-fashioned products in the financial services business appears to be coming back in style: whole life insurance.
As a First Command client, you’ve no doubt heard our case for whole life. We believe whole life is the preferred foundation for most insurance plans, supplemented by term and/or universal life policies as identified by the needs analysis in your overall financial plan. Whole life is designed to provide permanent guaranteed coverage for the life of the insured at a fixed monthly expense while providing other beneficial features, such as building cash value and the opportunities to add child coverage, waiver of premium option and the guarantee to purchase additional insurance at various times in the future. The cost is admittedly higher than term insurance or universal life products. Term insurance is intended to provide affordable coverage for temporary needs during a limited period of time. While universal life products do provide permanent coverage with guaranteed premium and death benefits (and are typically less expensive than whole life), the array of guarantees is fewer. Both term and universal life insurance play an important role in our risk management strategies to supplement whole life; however, in recent years the lower cost of both products has often made them the “go-to” cornerstone choice for many consumers, a choice which may well be cheaper, but also less effective.
But demand for term insurance began to wane in the second half of last year, when term sales were flat, according to LIMRA International, a worldwide consulting firm serving the insurance and financial services industries. During the same period, whole life sales rose 12 percent. Could it be that consumers are getting the message? Perhaps they are gaining a new appreciation for the value of a broad approach to risk management, one that calls for diversification in insurance as well as investments.
First Command has long recognized the importance of managing risk with a mix of permanent and temporary insurance products. Since the mid ‘60s we have advised clients to purchase whole life products to provide permanent coverage supplemented by term insurance to cover necessary, temporary needs. The truth is the need for insurance changes as people move through the typical stages of their life. For most people the need is relatively low when they are young and single, goes up as they marry and have children and declines as they move into retirement. But the need never goes away entirely. Many estate plans call for permanent insurance to provide liquidity to the heirs. There is always a need for some level of insurance coverage.
We continue to recommend whole life insurance as the foundation for the risk management cornerstone of a financial plan and the core, long-term holding to help our clients manage life’s risks. In recent years, we have increased our commitment to permanent insurance by adding universal life products to help protect those who recognize the value of this permanent insurance strategy later in life. However, there is always a need for some level of permanent protection, and we recommend that clients satisfy that need with whole life because of its long-term value, flexibility and stability. Ultimately we believe that the best time to anchor permanent insurance is now, while your medical status is certain.
First Command Financial Advisors are extensively trained to help clients build the right insurance strategy with the right products to address permanent and temporary needs. If it’s been a while since you looked at your coverage, give us a call. Together, we can help you protect your assets and provide for the financial security of your loved ones, now and for the rest of your life.
First Command Financial Services, Inc.