Whole Life Insurance is the only permanent life insurance product that builds equity. All other permanent cash value life insurance policies are built on a renewable term contractual basis and therefore can never create equity as the cost of insurance keeps rising and no portion of the policy is ever paid up but is merely leased on a year to year, month to month or quarter to quarter basis.
Before whole life insurance existed, life insurance was something that was purchased on a yearly, monthly or even a weekly basis. An option to continually renew insurance coverage was guaranteed by the insurance company without the requirement of the insured having to undergo more underwriting. All that was required to renew the contract was to pay a higher premium payment to cover the increasing risk that the insurance company might have to pay a death benefit as the insured aged.
Whole life insurance eliminated the need for ever-increasing premium payments by establishing a guaranteed fixed premium for the entire life of the insured. It also allowed a person to evaluate when the cash values in the policy would become more than all the premiums that had been paid for the policy up to that time. This made it possible for a person to see when the cost of insurance was overcome by the equity in the policy.
As this new life insurance contract lasted for the entire lifetime of the insured, and not merely for a certain time period of the insured’s life, it was named “whole life” insurance. Whole life insurance became the product known for guarantees, both for increasing death benefits and for the cash value that it developed. For once, actual ownership of the death benefit, not merely more premium payments, was possible when purchasing life insurance coverage.
Whole life insurance allows someone, over time, to own more and more of their own death benefit! Instead of the insurance company merely promising to pay a death benefit, the owner of the policy actually develops equity or ownership in the policy they purchase. This ownership or insurance owned by the policy owner is called Paid-Up Insurance and is only available to those who purchase whole life insurance.
Paid-Up insurance is a specific amount of death benefit that a policy owner has paid for entirely. There will never be another premium charged for that piece of insurance again, never! In other words, paid-up insurance is equity owned by the policy owner. Paid-up insurance can be favorably compared to the equity that someone develops while purchasing real estate or any other asset. Consequently, as with any other asset where equity develops, the policy owner can leverage that equity (money) on demand.
When a premium is fixed, the premium cannot increase over the lifetime of the insured. This creates a significant advantage for those who purchase whole life insurance. Once the cash values rise to the point of being greater than the premiums paid for the policy, the policy owner can easily determine the value of keeping the policy by seeing how significant each annual cash value increase is compared to the annual premium required. This annual return on premiums paid becomes huge over the lifetime of a whole life insurance contract.
In the late 1980’s, Congress passed some laws limiting how quickly paid-up life insurance could be purchased and still be classified as life insurance for tax purposes. Similar to paying off a house faster than the amortization schedule, some people were purchasing large amounts of paid-up insurance to make the cash values grow faster. Congress took action to limit ownership of paid-up insurance by setting requirements for how much paid-up insurance could be purchased in a single whole life policy.
These regulations are now defined in what is called the 7-pay period which broadly states that a life insurance policy can’t accept more in premiums than what it would take to pay off the entire policy, in any 7-year period of time. If the policy does, then it will face taxation both on the growth and the use of its cash value. These laws changed how quickly people could acquire paid-up insurance.
However, it is still possible and feasible to design a whole life policy to build cash values more quickly than a typical whole life insurance policy. Similar to making extra payments on other asset purchases, one can still purchase paid-up insurance and build equity in a whole life policy.
Insurance riders, added amendments to life insurance contracts, allow the policy owner to segregate premiums paid towards different types of insurance coverage. A life insurance agent can design a whole life policy with paid-up insurance riders and term insurance riders so that the policy will build cash value much faster than if the owner simply paid the base insurance premium. Using these riders can prove quite beneficial as a long-term financial tool because of the favorable tax treatment life insurance proceeds, withdrawals and policy loans receive under Internal Revenue Code 7702.
Care needs to be exercised when using these riders because in most cases the policy owner will want to avoid any tax ramifications that could result from adding these riders to a whole life policy. Even though cash values can accumulate quickly with certain riders, it may not always be in the policy owner’s best interest, to have these riders depending on how the policy owner intends to use their future cash values.
Funding whole life insurance policies with the maximum amount that is affordable and comfortable is a good financial decision for many people. It is also possible to pay extra premiums into an established whole life policy to increase cash value, but following the guidelines is critical when adding additional premium monies so that the policy proceeds will not lose their tax-preferred treatment.
Whole Life insurance is powerful estate planning tool, it lets any policy owner pass money on to a person, corporation or charity completely tax-free in many cases even if the policy has been overfunded and lost its tax-preferred treatment under IRC 7702.
Any life insurance policy design should be based on the purpose for which the policy is intended to be used. Designing the policy for its intended purpose will dictate what riders are necessary and which riders are not necessary.
All life insurance riders have a cost, you either pay up front or when the options provided by the rider are exercised.
Life insurance agents who thoroughly understand how each rider affects a life insurance policy both now and in the future are better equipped to design a policy with maximum cash value.
As a life insurance buyer you should, never feel compelled to purchase any life insurance policy until you fully understand why and how it was designed to benefit your needs. If you don’t fully understand, don’t buy, yet. If the agent you are working with can’t help you understand or give you clear explanations, find someone who can.
If you are not completely confident about a life insurance proposal you’ve been given, or you are having difficulty evaluating an insurance policy, you already own, we recommend getting an independent insurance review. So you can be sure about the insurance you own and have financial peace of mind. If you need an independent life insurance review you are welcome to use our complimentary review service just request a review here.
Your goal should be to pay a premium that is comfortable and affordable for you. And most importantly you want to make sure that what you are expecting from your policy will be there for you in the future.
At Life Benefits we specialize in designing beautiful Whole Life Insurance Policies that maximize cash value and meet the needs of people who want to grow their wealth. We believe everyone deserves the chance to be wealthy and have financial peace of mind.