The purpose of Whole Life Insurance is to provide coverage for the insured, for their entire lifetime. Traditionally, Whole Life Insurance is a consumer demanded product that offers more than just a death benefit by permitting the policy holder to build equity in the policy. There is no other product that can provide the living and death benefits that participating dividend paying Whole Life Insurance can provide. Life insurance by design, is not an investment, but rather a binding contractual agreement, which keeps your money safe and liquid so that you can use other people’s money without losing the growth on your own money. It is the financial tool that successful people have used for centuries to keep more of the money they make and stop losing money to taxes, interest, market volatility, management fees, and opportunity costs.
The Advantages And Disadvantages Of Owning Participating Whole Life Insurance
Equity implies ownership. Equity is the value of an asset minus the liabilities associated with that asset. A Whole Life Insurance policy holder builds equity in the policy as premiums are paid until the contract matures. At maturity, the policy holder will own 100% of the death benefit and will have zero further liability to pay premiums. At this point the policy is called a paid-up policy. Other insurance products provide for a death benefit to be paid if the insured dies while the policy contract is still in force. But the unique feature of Whole Life Insurance is that in addition to the death benefit provided, there is a provision made for the policy owner to own the death benefit. This provision, which is guaranteed by a legally binding contract, prevents the value of the Whole Life Insurance policy from being eroded by low interest rates and the ever-increasing cost of insurance to which typical Term and Universal Life Insurance contracts are subject.
The portion of the death benefit which becomes the personal property of the policy holder is called paid-up insurance. As paid-up insurance is a legal asset, belonging to the policy holder, it is no longer merely a number promised by the insurance company, and can be used as cash equivalent by withdrawing that value from the policy or using that value as collateral for a loan. Whole Life Insurance policies were developed because life insurance policy holders were not satisfied with simply purchasing life insurance on a month to month, or year to year basis, while never accruing any equity. Policy owners wanted to have an option to purchase life insurance that also provided them with the opportunity to develop ownership - because with ownership comes control.
The cash value of a Whole Life Insurance policy represents the value of the paid-up insurance in the policy plus the guaranteed cash value that accumulates – by contract. The cash value must equal the death benefit at the insured’s age of 100. This cash value can be withdrawn from the policy in accordance with the administration guidelines of each company. When a withdrawal is made from a Whole Life Insurance policy, the paid-up insurance, which the withdrawn cash value represents, is surrendered. This reduces the total death benefit by the amount of paid-up insurance that was surrendered. Surrendered paid-up insurance reduces the death benefits, and it also inhibits the future growth of a Whole Life Insurance policy permanently. That is because a withdrawal from a Whole Life Insurance policy can never be returned to the policy and that value, as well as the compounding growth of that value, is lost indefinitely.
In contrast to a withdrawal, a policy loan leveraged against the cash value of a Whole Life Insurance policy can be repaid to the insurance company. Furthermore, because a policy loan is not considered a withdrawal it does not affect the compounding growth of the policy like a withdrawal does. A policy loan is a collateral assignment of a specific amount of the paid-up insurance owned by the policy holder to the insurance company. The insurance company holds the paid-up insurance as collateral for the money it lends to the policy holder from the general fund of the insurance company. This prevents any value from being surrendered from the policy and allows compounding growth to continue based on the entire value of the policy.
As the name suggests, it is a loan from the insurance company, who in turn charges interest on the balance. The interest is calculated daily, charged annually, and only compounds when the loan interest remains unpaid. Policy loans taken against the paid-up insurance portion of the death benefit in a Whole Life Insurance policy can be used for any purpose the policy owner desires, as these loans are not regulated by any governmental regulations. This allows the owner of a Whole Life Insurance policy to leverage the cash values of their policy(s) to finance investments, transfer debt, or manage how they see fit, and create more value than if the cash value remained unleveraged in their policy(s). There are no questions asked by the insurer, only how much do you want?
Whole Life Insurance works because the insurance company assumes the risk of managing the premium dollars collected from the policy holder in exchange for providing a legally binding contract that provides a death benefit for the beneficiaries of the policy. That binding contract lasts for the entire lifetime of the insured. That is why it is called Whole Life Insurance, because it provides life insurance coverage for an entire lifetime, even if the insured lives past the policy maturity date. Instead of an ever-increasing premium as is found in Term and Universal Life Insurance contracts, premiums for Whole Life Insurance are based on a fixed level premium that is contractually ensured never to go up for the entire lifetime of the insured.
Premiums can be reduced, or even stopped, in the future, but the premiums can never be increased. As noted above, the coverage provided in Whole Life Insurance is slowly converted to paid-up insurance, which the policy holder owns rather than the insurance company. This allows greater liquidity and control over the cash values of the policy. The faster paid-up insurance is established in the policy, the faster the cash value in a Whole Life Insurance policy will accrue.
Life insurance proceeds are 100% tax free for the beneficiary. In addition to this fact, cash values grow tax-advantaged in Whole Life Insurance policies. For this reason, in a survey taken by Limra (formerly Life Insurance and Marketing Research Association), 11% of people who purchase cash value life insurance do so not merely for the death benefit but also for the tax advantages. Twenty-two percent of people purchase cash value life insurance for the ability to transfer wealth tax-free. The Tax Foundation (U.S. based) estimates that $1.68 billion was transferred by clients in 2010, tax-free, and nearly 40% of all such policies were sold with premiums of $20,000 or more annually. Nevertheless, Whole Life Insurance can benefit individuals and businesses of all ages and income levels. As is a general rule in life, the more you put in the more you will get out. However, with a properly designed participating whole life policy you or your beneficiaries will always get out more than you put in, with guarantees.
Participating (Par) Whole Life Insurance policies offer dividends to policy holders. Dividends are paid to policy holders based on the profits, which the insurance company has earned over the past year. Dividend rates are determined by the insurance company’s board and are paid annually to policy holders on the policy anniversary date of each participating policy. Dividends are classified as a “return of premium paid” by the CRA and are therefore not taxable if they are used to purchase more paid-up insurance. If they are paid to the policy holder directly, dividends will only be considered income once total dividends exceed the cost basis of the policy.
Participation in the dividends of a life insurance company can significantly increase the cash values and the total death benefit in a Whole Life Insurance policy over time. Some Life Insurance Companies that offer participating policies are mutually held Life Insurance Companies (owned by the policy owners) instead of stock held Life Insurance Companies (publicly traded, with shareholders). The participating policy owners are the shareholders of a mutually owned insurance company. Dividends are not guaranteed nor are they guaranteed to be paid at any specific rate to policy holders. However, once a dividend is declared it is guaranteed to be paid and cannot be removed from the policy without the policy holder’s specific authorization once it is paid - they are fully vested. Dividends may be used, at the policy holder’s discretion, to:
Not all life insurance companies that sell Whole Life Insurance offer dividends. If a company does not offer dividends to Whole Life Insurance policy owners, then the policy is considered a non-participating Whole Life Insurance policy.
