Understanding Whole Life Insurance and Crafting the Best Whole Life Insurance Policy

Typical financial planning has forsaken one of the best financial products. Some people believe that whole life insurance does not produce a high enough return to make it worthwhile to own any longer. Typical financial planning now says, “buy term and invest the difference”.

But many people are losing money because of typical financial planning! Other types of insurance plans expose people to risk and financial loss.

What Is Whole Life Insurance?

Whole life insurance is a permanent life insurance product that will last the entire lifetime of the person who is insured and provide a tax-free death benefit to the beneficiary(ies) of the policy.

Whole life insurance is the only life insurance product available today that develops equity for the policy owner. All other forms of life insurance coverage, even so-called “permanent” universal life, variable universal life, and indexed universal life contracts, will not develop equity for the policy owner.

Participating whole life insurance, a type of whole life insurance, pays the policy owner dividends when the insurance company generates a profit.

Cash Value

Cash value in a whole life insurance policy is similar to equity in a home.

Quick Note: The cash value in universal life insurance products is not the same as whole life cash value. Cash value in universal life, variable universal life or indexed universal life insurance is not equity. It is money in an account that has not been used to buy insurance coverage yet.

In a whole life insurance policy, the policy owner or payor pays-up, think “pays-off,” a certain portion of the policy’s death benefit with each premium payment.
Every time a policy premium is paid, more of the insurance policy is transferred to the policy owners’ ownership. The portion of the policy owned by the policy owner is called paid-up insurance.

Paid-up insurance has a cash value. The cash value of a whole life policy is available for the policyholder to withdraw or to use as collateral for a policy loan.

Crafting the Best Whole Life Insurance

At Life Benefits we know that the best whole life insurance policy is one that will fit the customers’ needs not only right now, but also in the future. Crafting a whole life insurance policy is more than just putting numbers into illustration software, it’s also about knowing the customers’ financial goals so we can craft a policy that will help them reach those goals.

Whole Life Insurance Riders

Riders can be used to modify a whole life insurance contract to fit the needs of the policy owner or insured. Here are some common riders:

  • Term rider
  • Paid up additions rider
  • Accidental death benefit rider
  • Terminal illness rider
  • Critical or chronic illness rider
  • Waiver of premium for disability rider

Some of these riders are free, some of them have an added cost. Not all of these riders are necessary to craft the best whole life insurance policy.

We have a love hate relationship with term riders, they can be useful or merely become an extra cost for the policy owner. We use them strategically when they will benefit the policy owner.

One of our favorite riders is the paid up additions rider. The paid up additions rider will cause policy cash value to grow faster and give the policy owner access to more money sooner.

An accidental death benefit rider adds more death benefit to a policy in the case of certain accidents that result in the death of the insured.

Terminal illness and critical chronic illness riders are often free riders that can be attached to a policy. The rider remains free unless the policy owner activates the rider down the road. These types of free riders are nice to have on a policy.

The waiver of premium rider covers the policy base premium if the insured policy owner gets disabled. This is a paid rider. There are also rules and restrictions attached to this rider that are good to know when you are deciding if you will purchase it or not.

Whole Life Insurance Rates

Most people think of whole life insurance as being more costly than term life insurance. But despite whole life insurance rates many people regret not buying whole life insurance earlier in life.

Over time, whole life insurance is actually less costly than term insurance.

Look at this 15-year level premium term life insurance quote. You can see that this term insurance policy will cost $4,500 after fifteen years, as in the policyholder will have paid $4,500 after 15 years. term insurance rates

From year sixteen forward, the annual premium for the term insurance policy increases every year, making it more and more costly to keep the coverage.

In contrast to the term policy, which provides a fixed $500,000 of life insurance coverage, this whole life insurance policy initially requires a higher annual premium, but by year fifteen the whole life insurance policy has developed $130,914 of equity (guaranteed cash value). Which means there is $15,419 of more money that can be withdrawn or borrowed from this policy than what has been paid for it. Whole life insurance rates

If the policy owner surrendered this policy in year 16, they would receive at least $15,419 above and beyond what they had paid for the whole life insurance over the past fifteen years. Probably more because of dividends.

On top of that, by year fifteen, this whole life policy has $70,777 more guaranteed death benefit than what the term life insurance policy has ($500,000), which will continue to increase over the lifetime of the insured as dividends buy more paid-up insurance.

Even though whole life insurance rates may be higher. Whole life insurance is much less costly than term insurance over time.

Dividends in Whole Life Insurance

The policy owner also has the opportunity to earn dividends with the whole life insurance policy. Dividends earned will add both to the cash value of this policy and to the death benefit.

Rate of Return and Whole Life Insurance

Whole life insurance doesn’t provide a rate of return but rather a guaranteed value with the potential of earning dividends.

In this example illustration of whole life insurance, when the premium is paid in year sixteen the annual cash value is contractually guaranteed to grow by at least 86.74% more than the annual premium.

Since the cost of insurance has already been recovered by year sixteen, the annual return on premiums paid from year sixteen on, show why people should own whole life insurance.

Other Benefits of Owning a Whole Life Insurance Policy

  1. If a policy owner has a 12% credit card debt and borrows from the insurance company to pay off that credit card debt they can keep the interest they would have paid to the credit card company over time.
  2. A business owner can use a policy loan to expand their business or add equipment. Using a policy loan for business purposes can also give the business owner an interest deduction in some cases.

Will You Need Life Insurance When You Retire?

Many people have been told by typical financial advisors that they won’t need life insurance coverage once their house is paid off and the kids have moved out. But the new Secure Act signed by the president in 2019 takes away the “Stretch IRA” that many wealthy individuals have used to pass money on in a tax-favorable manner to their adult children and/or grandchildren.

Whole Life Insurance is the new “Stretch IRA” for people who want to pass on tax-free money to their children and grandchildren.

Whole life insurance also comes in very handy for retirees when the market experiences a downturn. Instead of drawing income from their retirement accounts and destroying principle during market down years, they can use cash value provided by their whole life insurance policy. Once the market corrects they can go back to living off the interest of their retirement accounts again.

Without the cash value in the life insurance, some retirees are forced to go back to work or reduce their lifestyle during and after a market correction.

Finally, nobody knows exactly when they are going to die or need assisted living. Whole life insurance can be transferred into a lifetime annuity that provides a guaranteed income to supplement retirement income or to help with the cost of assisted living.

Whole Life Insurance and Taxes

Whole life insurance has been called the “sweetheart of the IRS tax code” because of the tax benefits associated with owning it. Whole life insurance is similar to a self-directed Roth IRA except it also has a death benefit and it is free from the regulations that surround IRAs.

Conclusion

When it comes to financial planning you want the best. Whole life insurance is the best way to keep more of the money you make, grow your wealth safely and have financial peace of mind. To get a whole life insurance policy crafted for you, schedule an appointment.

We will ask about your financial goals so that we can craft a good policy for you and find good whole life insurance rates for you. Schedule your appointment now.