Whole Life Insurance
Whole life is an insurance policy that provides lifetime insurance protection with significant guarantees and tax benefits for the policy owner. Actuaries who design a whole life policy begin by determining what rates are going to be guaranteed. Once the guaranteed rates have been set, they are used to determine policy premiums and values. Guaranteed rates and values are based upon conservative assumptions. A mutual life insurance company will then adjust these rates and values to current conditions through the mechanism of a non-guaranteed dividend. Because life insurance is seen as beneficial to the welfare of society, significant tax benefits have been given to it that are not found in other financial instruments.
Whole life insurance provides a means by which families and businesses may enjoy the benefit of their human life value when it is threatened by loss.
Human Life Value Protection
Property values, whether they exist in the context of a family or a business, are in fact the result of human effort. Human life value is clearly seen in a family whenever income is earned to provide for that family’s economic needs. Human life value is also seen in a business where a key person is often identified as a significant contributor to revenue and earnings.
Whole life insurance provides a means by which an individual may insure their human life value.
Most people see the importance of insuring the value of property such as their home or car for its replacement and are able to do so with their casualty insurance. The human life value of an individual is also insurable for its replacement value on a permanent basis with whole life insurance. Whole life insurance provides an effective way of permanently indemnifying a family or business against the loss of its most valuable asset.
There are many benefits that a family may enjoy from the production of income, such as the purchase of a home, rearing and education of children and the enjoyment of life. The indemnification of the breadwinners in a family will ensure that these benefits will continue to the survivors in the event of death.
The death benefits of life insurance can assure the economic continuity of a family at a time when it is faced with the greatest of all possible traumas: the death of a father, mother, husband or wife. Whole life insurance can also assure financial stability through the funding of:
• Mortgage protection;
• Education funding; and
• Income needs.
Businesses face special insurance funding needs in order to provide a business continuity plan that will protect the owners in the event of death. Whole life insurance is ideally suited to provide the capital needed to adequately buy the interest of a deceased owner and indemnify the business against the loss of the services, expertise and skill of a key person. Life insurance is ideally suited to address four major areas of business planning:
• The funding of buy-sell agreements and stock redemption plans;
• Funding of supplemental retirement programs;
• Key person indemnification; and
• The payment of loans and mortgages.
Planning for the orderly transfer of property at death can minimize taxes and provide for heirs in a way that will reflect an individual’s desires. Whole life insurance plays a key role in providing for loved ones by offering:
• Adequate liquidity to pay estate and inheritance taxes;
• Assets to generate income for a surviving spouse and children;
• Estate equalization among heirs; and
• Funding for special needs children.
One of the unique benefits of whole life insurance is the way that it enhances the value of other assets in your estate. The presence of guaranteed whole life insurance gives the owner the ability to use estate assets in ways that would not be possible if the insurance did not exist. Whole life is the “permission slip” that may enable you to maximize retirement income and your personal net worth. For example:
• The Power to Consume – The presence of whole life insurance in your estate will allow other assets to produce greater income by providing access to the principal as well as interest as a source of income. Life insurance gives the owner the power to consume assets that would otherwise have to be managed in an ultra-conservative fashion in order to preserve the principal and the income stream it produces. It is also important to consider premium costs when evaluating the consumption of principal.
• Pension Maximization – Most retirees will select a joint and 50% survivor annuity as the retirement income option on their pension plan. The cost of selecting this option is a lower retirement income as much as 15%. This is followed by an income to the surviving spouse of 50% of the lowered retirement income. The presence of permanent whole life insurance may enable a retiree to take a much higher retirement income in the form of a single life annuity because the insurance benefits will be available to a surviving spouse as a future source of income.
• Charitable Remainder Trust – The cost of successfully building a business or managing a personal investment portfolio is often measured by the enormous capital gains tax that must be paid when a business owner decides to sell a business interest or portfolio holdings in order to fund retirement income. Often financial success brings with it a desire to express benevolence towards those charitable causes that are of particular interest. With a charitable remainder trust, these two seemingly diverse needs and desires can meet in a plan that provides a lifetime income for a benevolent donor, a substantial bequest to a charity of choice, avoidance of the capital gains tax, and a significant income tax deduction. The existence of permanent whole life insurance in the estate of a donor makes it possible to achieve the desired charitable intent with all the collateral benefits while providing an intact transfer of estate assets to heirs.
Benefits of Whole Life Insurance
The Protection of an Instant Permanent Estate
Instantly with the payment of the first premium, the insurance company sets aside the entire death benefit for your family. Whole life insurance provides a guaranteed death benefit for the entire life of the insured, assuming premiums are remitted by the insured in accordance to the policy structure.
Life insurance is uniquely different from all forms of savings and investment vehicles such as bank accounts, IRAs, 401(k) accounts, mutual funds, and brokerage accounts because it can continue to grow even if you are disabled. Disability usually brings with it the strain of reduced income, increased expenses, and dissolution of existing savings and investment. The Waiver of Premium Rider guarantees that if disabled, you will not lose the umbrella of financial protection provided by a whole life insurance policy. The policy will continue to provide death benefit protection, the cash values will continue to grow and dividends will continue to be paid just as they would if you had not been disabled.
In many states the benefits of life insurance are protected from the claims of creditors. If your state provides this legal protection, the cash values and death benefit of a whole life policy will be protected from lawsuits that can claim other assets such as bank accounts, mutual funds, and brokerage accounts.
Distribution like a Will
Life insurance is distributed like a will in that you specify who and how much of the benefit will be distributed to each beneficiary. Unlike a will, however, life insurance has the added benefit of privacy. Wills, once probated become public documents. The beneficiary distribution of life insurance is a private contractual agreement between the policy owner and insurance company that passes outside of a will and thus provides privacy for the beneficiary.
Tax-free death benefit
The death benefits of life insurance policies are free from all federal income taxes. The enormous value of this benefit must not be underestimated, especially in light of constantly growing government expenditures and taxes.
The growth of cash value inside of the life insurance policy is deferred from taxation while the funds remain in the policy. This is yet another wealth protecting benefit for families and businesses provided by whole life insurance.
Tax-favorable access to policy cash values through withdrawals of dividends
During the insured’s life, cash values can be accessed under favorable FIFO (First-In-First-Out) tax rules. This means that dividend withdrawals are tax-free up to the amount cumulatively paid in premiums.
Tax favorable access to policy cash values through policy loans
Loans taken by the insured against a life insurance policy will not trigger a taxable event even though the policy may have a large gain in excess of premiums paid.
You have the option of having the policy pay for itself over time by applying dividends to pay premiums. This feature may be invoked or changed at any time to meet the changing circumstances of your life.
Ability to invest cash value in growth securities
Policy values are always available via a policy loan and may be used for a variety of reasons including investment in growth securities.
Ability to pay itself back from anticipated earnings
Once a policy loan has been taken, the annual dividend can be used to help pay back a policy loan.
You can make direct loans to yourself for any reason
Cash values can be accessed on a demand basis via a policy loan at any time and for any reason without the application and approval process that is required for consumer or business loans. Whole life insurance can then free a policyholder from reliance upon commercial lenders and high interest rates.
Collateral for a loan from a bank
A whole life insurance policy may be used as collateral to obtain a loan from a bank at favorable interest rates. The ability to either borrow directly from the insurance company or from a bank gives the owner of a whole life insurance policy significant flexibility when there is a need to access policy values.
Flexible loan repayment terms
Life insurance policy loans are flexible to the extent that they do not need to be paid back unless the policy owner decides to pay them back. Once a loan is taken out on a policy it can be paid back at the option and discretion of the policy owner. When a policy loan is paid back, there will be a commensurate increase in the death benefit of the policy which may be re-borrowed at a future date or paid out to the beneficiary.
Death benefit increase
When dividends are used to purchase paid-up-additions, death benefits will grow, helping offset the eroding effects of inflation. Once a dividend has purchased paid-up-additions, the additional death benefit and cash value of the paid-up-additional insurance is guaranteed.
With term life insurance rates half of the cost they were 10 years ago, it’s no surprise that many people in the market for life insurance consider term insurance an attractive option. However, according to LIMRA, more than half of all life insurance policies sold in the U.S. are permanent policies
The following are four scenarios where permanent life insurance might be your best option:
Provides lifelong protection – Dan is a 52 year-old married man. He is a father of two children. He let his 20-year term life policy expire once his kids graduated from college. But last month, he was diagnosed with a serious heart condition. Even though his wife still relies on his income to pay the bills, he has realized that it may be very expensive or impossible for him to re-qualify for life insurance.
Because whole life insurance coverage doesn’t need to be renewed (as long as you pay your premium), it guarantees financial protection as you age, even if your health changes. The premium remains level.
Provides funds for emergencies, opportunities or other needs – College is a long way off for Carla’s three-year-old daughter Julie. But being a single mom, Carla wants to make sure that when the time comes, her daughter can get the education she deserves, no matter what the future brings.
The primary purpose of whole life insurance is to protect those you love, but it also accumulates cash value that grows tax-free or tax-deferred. You can borrow against the cash value for any purpose you wish, such as college tuition.
Covers final expenses and estate taxes – When Bill died at age 76, he left behind a restaurant and catering business valued at $2.8 million. To cover state estate or inheritance taxes and attorney fees, his wife Susan was forced to quickly sell the business at a steep discount, rather than passing it along to their three children.
The death benefit from whole life insurance (or, for that matter, any life insurance policy) gives you instant liquidity at death to pay for things like attorney fees and estate taxes. It also helps your family members avoid having to sell off assets at a bargain-basement price, ensuring that your heirs can continue the legacy you worked hard to create.
Maintains retirement savings – Nancy lost her husband, Jeff, when he was only 57, just eight years shy of his planned retirement. Nancy is in great health, and if her family history is any indication, she will likely live well into her 80s. Unfortunately, because Jeff didn’t have any life insurance, Nancy will be forced to prematurely cash out his 401(k) and tap into their retirement savings, dashing her plans for a financially secure retirement and the chance to move to Florida and travel with her grandchildren.
Whole life insurance coverage provides income tax-free cash immediately, no matter when you die, allowing your surviving family members to enjoy the retirement savings you worked so hard to set aside.