Blended Life Insurance

Blended life policies combine whole life and term life insurances. They allow you to purchase coverage at a substantially lower cost than you would ordinarily pay for whole life. Insurance agents, however, generally earn lower commissions when they sell blends, so they may not go out of their way to offer or educate you about them. They’re typically sold to customers of fee-only insurance advisors, or to buyers of large cash-value policies who might have several agents competing for their business. But anyone who is aware of the product and will search for an agent that sells them can get a blend. Although not offered by all, they’re sold by a number of first-rate companies. Let’s look at how they work:

You’re in need of, say, $300,000 in coverage. The blend policy that you choose might contain $150,000 worth of whole life and $150,000 worth of term insurance (you can usually choose the ratios of coverage that you want to begin with). Every year the policy’s dividends go toward purchasing more whole life coverage (known as paid-up-additions), which gradually replaces the term insurance. You can also buy paid-up additions with part of your premium. You pay the full sales commission on the term and whole life portions. But the agent earns very little on the paid-up additions that you acquire, which means money saved for you.

You can lower your insurance costs with blends in one of two ways, depending on what you wish to achieve. First, the blend can lower your premium. When insurance agents compete for your business they’ll usually do it by showing you the largest amount of coverage you can get for the smallest sum of money. This type of blend builds cash value more slowly in the policy’s early years (because a lower ratio of whole life is used to begin your coverage) but catches up later on.

There is a risk when lowering your premium, however. You’re counting on the dividends you earn to be large enough to buy enough paid-up additions to replace the term insurance on schedule. If interest rates fall or term prices rise, your dividends may not be sufficient and your policy will begin to unravel. In order to save it, you’d have to increase the premiums you pay or pay them for a longer period of time. This risk can generally be avoided by not cutting your premium too far below what you’d pay for regular whole life.

The second way that blends can lower your insurance costs is by building cash value faster than usual. You pay the same premium as you might for whole life, but less of your premium is lost to sales commissions; instead, it goes directly into your policy. This approach can be attractive to investors who desire a higher tax-deferred retirement fund. It must also be stated, however, that with blends the death benefit generally remains the same for life, so inflation may erode its purchasing power.

The best buy in blends will typically result when you pay the full whole life premium (or almost that amount) for a mix which contains the largest possible quantity of term coverage. That will put the maximum amount of money to work for you in your policy, as well as eliminate policy risk.