Participating Whole Life Insurance: The Pros and Cons

Understanding Life Insurance Part 2

You’ll hear many arguments for and against whole life insurance. Whole life insurance can create cash value but could also have tax consequences. These are the pros and cons of the policy. Many people wonder what whole life insurance truly is and if the benefits of the policy would help them. Here we cover how whole life insurance works, all of the pros and cons of it, and how it compares to term insurance.

How Does Whole Life Insurance Work?

How does whole life insurance work

Participating whole life insurance (PWLI) is a contract that is designed to remain in force for the insured’s whole life and typically requires premiums to be paid every year. The contract is between the policy owner[i] and the insurance company where the insurance company contractually guarantees to pay to the beneficiaries of the policy a certain death benefit upon the death of the insured; and to share with policy owners (participants, policyholders) the excess profits the company generates. This sharing of profits is referred to as dividends but is considered a refund of the premium according to current tax law in the United States. Therefore, these dividends are not treated as taxable income in most cases.[ii]

Participating vs. Nonparticipating Whole Life Insurance Policies

A key factor in whole life insurance is whether the policy is participating, where policyholders may receive dividends, or non-participating, where policyholders do not receive dividends.

Whole Life Insurance Pros and ConsParticipating whole life insurance pros and cons

The ability to collateralize a policy is one of the major pros of whole life insurance. Participating life insurance contracts provide for the buildup of something called cash value. This cash value is contractually guaranteed to be made available to the policy owner through the policy loan and/or surrender provisions. These provisions allow the policy owner to collateralize their policy and borrow money from the insurance company, or to surrender death benefit and withdraw equity from their policy. This cycle can help with the accumulation of wealth and the creation of a financial legacy. 

On the other hand, a loan that is taken from the insurance company against a policy in this manner will be subject to interest and if this interest and future premiums are not paid, the contract may lapse and the loan will then be considered a withdrawal and could be subject to taxation.[iii] If the life insurance plan isn’t managed well, it could become a tax liability, which is the main con of whole life insurance plans.

That being said, if the loan interest and premiums are paid according to the contract, the policy will not lapse and the owner of the policy can use the capital borrowed for whatever need or purpose intended. The only requirement to initiate a policy loan is to assign the policy to the insurance company for security, by either making a phone call or completing a simple loan request form. Policy loans alter the death benefit of the policy and may alter the dividends that are paid in some PWLI contracts.

The policy loan provision of participating whole life insurance policies guarantees a relatively liquid source of equity which can be borrowed and self-managed. When done appropriately, with the assistance of a good consultant, this positive cash flow can be used to create more value, wealth, and abundance. It can also create the ability to increase policy premiums and therefore allow you to repeat this cycle. Because of this cycle of positive cash flow, and with the proper management the pros of having whole life insurance easily outweigh the potential tax con that could result from improper management.

Here’s a breakdown of the whole life insurance pros and cons we just went over:


  • Build up of accessible cash value over time
  • Tax-deferred growth on cash value
  • Access to tax-advantaged loans for any reason
  • Potential to receive dividends
  • Tax-free death benefits and the ability to provide for your family even after you’re life is over


  • Poor policy management can lead to costly tax liabilities

How Are Whole Life Dividends Determined?

Participating Whole Life Insurance provides a guaranteed cash value and death benefit and the potential of earning dividends. Whole life insurance is the only life insurance contract that allows you to receive dividends. Dividends earned can add both to the cash value of a policy and to the death benefit with the selection of the right dividend option. Insurance dividends work similarly to stock dividends. When you pay your premium, a portion of this value will be placed in a participating account which is invested by the insurance company. Each year, policyholders receive a portion of the earnings (dividends) from the participating account. This dividend payout depends on the economic well-being of the insurance company providing the policy. 

Yearly dividends will vary on a number of factors specific to the policyholder and insurance company. Here are the factors that could influence your annual dividend amount: 

  • Current interest rates
  • Insurance company’s revenue and expenses  
  • Mortality rate of policyholders
  • Insurance company’s profit retained in cash reserves for the year
  • Beginning and ending cash value of the policy 
  • Net of loans taken from whole life policy 

While dividends can vary depending on all these factors, it’s possible to research how individual insurance companies have performed in the past with dividends. For instance, you can see that certain insurance companies have paid dividends to their policyholders for the last 100 years, without missing a single year obviously this time span includes more than one economic recession even the great depression. Doing this research can help you feel more confident about an insurance company’s strength and its continued ability to pay dividends.

Whole Life Insurance vs. Term Life Insurance

When discussing whole life insurance, one of the most common questions is about the difference between whole life and term insurance. While both policies involve premiums that result in a death benefit, there is no accumulation of cash value with term life insurance. A term life insurance policy only covers someone for a period of time, and there is only a death benefit if they die during this coverage. Term insurance policies can be cheaper though, short term.

Whole life insurance can be, initially, more expensive than term, but it also creates an accumulation of wealth that can be collateralized or borrowed. This process can help build a financial legacy as well as provide a death benefit. There are pros and cons to both whole and term life insurance. Choosing which is right for you depends on your circumstances and financial goals.

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The Bottom Line

The guaranteed loan provisions found in contracts of Participating Whole Life Insurance are rewarding to those who understand and manage them accurately. However, if these policies are not managed well, the policy could lapse or create a tax liability for the owner.

Life Benefits can help you by:

  1. Properly designing PWLI policies that meet your needs
  2. Accurately aiding you in the management of your policy  and policy loans
  3. Guiding you on how your premiums and loan repayments should be made.
  4. Providing you the answers you need to make decisions about your current and future financial needs.

If you have any questions or if you are interested in setting up a life insurance policy, schedule an appointment with Life Benefits.

Part 1. Understanding Life Insurance
Part 3. The 7 Biggest Lies You’ll Hear About Life Insurance

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