A whole life insurance policy is also referred to as permanent life insurance that is in force for the life of an insured so long as the premiums are paid. Permanent life insurance has many benefits that policy owners can take advantage of while alive making them far more useful compared to the death benefit-only policies (term insurance).
There are several types of permanent life insurance available however whole life insurance is the most common type others include: universal life, variable universal life, and indexed universal life.
While permanent insurance options typically have higher premiums than term policies, they offer benefits that term policies don’t. Some of them are the ability to build cash value (distributions can be tax-free or tax-deferred depending on individual factors), minimum death benefit, dividends, and others.
Basic differences between permanent life insurance options
Whole life
Whole life insurance policies offer a fixed payment for the life of the policy. In addition, it offers guaranteed death benefits, cash value accumulation guarantees, as well as additional growth potential based on use and company performance, etc. As long as premiums are paid, the benefit amount can be counted on for your beneficiary.
Universal life
These policies allow you to vary the premium payments as well as the guaranteed minimum death benefit, so long as the premiums you pay are able to maintain them. Universal life offers more flexibility and lower premiums, however, the trade-off is that the guarantees are not as strong as that of whole life.
Variable universal life
Variable Universal life insurance policies have sub-accounts that allow you to potentially earn greater cash value. This is the riskiest choice to go with as the downside potential is higher than the other options. Cash value here is based on the performance of the sub-accounts.
Indexed Universal Life
This type of policy offers flexibility just as universal life policies do in that you can vary the premium amount and guaranteed minimum death benefit while possibly participating in more upside potential. They are linked to an index such as the S&P 500 which can gain interest and is then credited to the policy. The downside is that your interest growth is capped, the positive is that your downside is also capped.
Loans of whole life insurance policies
One of the major benefits that businesses and individuals choose to get a properly structured whole life insurance policy is so that they can take loans against the policy (NOT from, as with a 401k). There is a calculation that goes into determining just how much you can loan against a policy without creating a policy issue so talk to your advisor to determine what it is.
Loans allow you to increase the growth of your cash value which is what many companies use them for. Their own internal banking system helps guarantee company growth as they are able to control the repayment amount based on current normal loan rates.
This is a very basic explanation of the use of loans, now there are some downsides to keep in mind as well. First, if they are not paid back then the loan amount comes out of the death benefit. What this does is also lower the total cash value the policy has and may limit your ability to use it to its fullest potential. Second, if too much cash is funneled into the policy it will become classified as a modified endowment contract losing much of its tax benefits and may even create a taxable event.
What are whole life insurance dividends?
Whole life insurance policies are also called participating life insurance policies when the insurance company pays policyholders a portion of the company’s profits earned during the year. Typically speaking they can do this without causing a tax event because it’s considered a return of premium to the policyholder. In addition as a policyholder pays more into their policy the dividend value earned increases over time.
There is a different options that a policyholder can choose for their policy: additional insurance(this is my own personal choice as well as the choice of many companies), cash/check, savings account with the insurance company to earn additional interest, and finally premium reductions.
Other uses of whole life insurance cash value
For corporations, real estate investors, and other investors the cash value is used to snowball itself by purchasing income-producing assets. It can be used in a variety of ways however perhaps simply as a starting point for those learning to build their own asset base or simply from a consumer standpoint while still building cash value (or not in the emergency options described below).
In the book “Become your own banker” Nelson Nash describes how you could use a policy and its associated cash value to buy a new car every 4 years while repaying yourself the interest instead of a bank. This simple example can be used for many situations yourself to grow the size of your cash value in a policy and then potentially start additional policies using your first as a monthly income or funding source for the rest.
For some though it may make sense to get a loan against their policy to pay for an emergency situation like a car breaking down, health care, etc. These situations are terrible for us all to consider however how you utilize your policy is your choice as the cash value within it is owned by the policy owner. Just be cautious about what you do and educate yourself as much as you can.
Term vs whole life
From a cost point of view, I totally agree that BASIC whole life insurance policies are like overly expensive term insurance policies. That being said, the term has a very low premium rate as well as a benefit payout rate. You are guaranteed to be paid for a whole life policy if payments are paid and nearly guaranteed to NOT be paid on a term policy.
Should you consider whole life insurance
If you want more certainty, control, and growth of the money you earn then a whole life insurance policy is most likely for you. There are many factors to consider when discussing an overall financial plan which cant be reduced to a single answer since so many factors for you personally may differ from the next person. That being said whole life does offer predictability, guarantees, and fixed premiums.
To learn more about how to utilize a whole life insurance policy for your situation enter your information. This is a no-cost, no-obligation conversation.