Whole Life Insurance Advice
Whole life insurance, which is permanent insurance that remains in force for the entire life of the insured, has a cash value component. Part of the premium, regardless of whether is it paid in installments or as a single lump sum, is invested. Earnings grow tax-deferred for the life of the insured.
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Whole Life Insurance as Retirement
For these reasons, whole life insurance can be used not only as an insurance vehicle, but also as a way to build retirement savings and help with estate planning. The premiums paid by the insured can be significantly higher than those paid for other types of insurance. But, a whole life policy that remains in force for the life of the insured, especially one that is purchased early in adulthood, can be much more cost effective than a term or universal life policy.
Because it is part insurance product and part investment product, a whole life policyholder must exercise financial discipline over the years. With the exception of a single premium policy, premiums must be paid according to the schedule or the policy will lapse. Should the policy lapse, the policyholder will only have access to a limited portion of the cash value. And, maybe more importantly, he or she will lose the death benefit that would be paid to the beneficiary. But, for those looking for an insurance option combined with the ability to increase and investment, a whole life insurance policy will provide the following benefits.
Choosing the Right Whole Life Policy
There are six primary types of whole life insurance from which to choose:
Participating Whole Life
A participating whole life policy “participates” in the financial success of the insurance company. The insured can choose to take the dividend as cash, add it to the cash value of the policy or use it to pay the premium.
Because the earnings on a whole life policy grow tax-deferred for as long as the insured pays the premiums, this type of policy can be a good way to accumulate money for retirement. The growth that can be achieved happens more quickly as more money is retained within the account to compound over a number of years.
Non-Participating Whole Life
There is no dividend paid on a non-participating whole life policy. However, the costs remain fixed for the life of the insured and premiums are lower than a participating policy.
Level Premium Whole Life
As the name implies, premiums, which are paid in installments throughout the life of the insured, remain level.
Limited Payment Whole Life
Rather than paying premiums for life, a limited payment whole life policy allows the insured to pay the premiums for a set number of years.
Single Premium Whole Life
One lump sum premium is required to purchase a single premium whole life policy. This kind of policy is more often used as an investment strategy or as part of estate planning. A single premium whole life policy can also be purchased in place of a single premium annuity. One of the best features of a single premium whole life policy is that equity is immediate. The policyholder does not have to wait years or even months to use the policy as collateral or to borrow against it.
Intermediate Whole Life
The premiums on an intermediate whole life policy are flexible.
Whole Life Insurance Level Premiums
Unlike term life policies, most whole life insurance polices offer level premiums. The premiums remain level and fixed each year. They do not increase as the insured gets older.
What does change over time is the amount of the premium that is applied to the insurance portion of the contract and the portion that is applied to the investment portion. As the insured ages, the portion that goes toward the insurance increases because the probability of paying the death benefit increases.
Borrowing Against a Whole Life Insurance Policy
Provided there are sufficient funds within the account, a whole life insurance policy can be borrowed against or used as collateral for a loan. While each life insurance company offers different restrictions and terms, the availability of funds can be quite helpful in the event of a job loss or other financial emergency. Not only can the policy owner borrow money, he or she can pay the premiums from the cash value portion of the policy in order for it to remain in force.
A whole life policy can also be surrendered for the cash value. While the policyholder may not be able to retrieve the entire built up cash value, he or she can still surrender the policy.
Whole Life Insurance and Retirement Savings
Interest and earnings on a whole life policy grow tax deferred until the policy owner either surrenders the policy or the beneficiary receives the death benefit.
Many people choose to purchase whole life insurance policies as part of a retirement plan. Not only do the get the benefit of insuring their loved ones from financial hardship, the cash value portion of the policy acts as a safety net.
Avoiding Excessive Estate Taxes with Whole Life Insurance
It’s always important to seek the advice of a tax professional prior to using a whole life policy as a method of estate planning. However, in general, if executed properly, a whole life policy can avoid excessive estate taxes.
The accumulating cash value of a whole life policy is not taxable under current federal tax guidelines. In addition, the dividends paid to the insured are considered to be the return of premium and are also not taxable as long as they are not higher than the premiums that have been paid in.
The death benefit of a whole life policy provides a payment to the beneficiary that is not taxable. However, if the insured owns all or part of the whole life policy at the time of his or her death, the value owned might be included as part of the overall estate. This will trigger not only federal estate taxes but also, more than likely, state inheritance taxes.
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