What is Participating Whole Life Insurance?

Understanding Life Insurance Part 2

Participating Whole Life Insurance (PWLI) is a contract that remains 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 contract a certain death benefit upon the death of the insured; and to share with policy owners (participants, policy holders) the excess profits the company generates. This sharing of excess profits is referred to as dividends but is considered a refund of premium according to current tax law in the United States. Therefore, these dividends are not currently treated as taxable income in most cases.[ii]

PWLI contracts provide for the build up 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 paid up insurance and withdraw the premium paid for it. A loan which is taken from the insurance company against a policy in this manner will be subject to interest charges 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 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 may alter the dividends paid and the death benefit under the contract of some PWLI contracts.

The policy loan provision of PWLI polices guarantees a relative 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.

The guaranteed loan provision found in contracts of PWLI are rewarding to those who understand and manage them accurately but if not managed well could end up causing a policy to lapse or create a tax liability for the owner.

Life Benefits can help you by:

  1. Properly designing PWLI policies which meet your needs
  2. Accurately aiding you in the management of your policy loans
  3. Carefully guiding you on how your premiums and loan repayments can and need to be paid
  4. Continually providing you the answers you need to meet your current and future needs
Part 1. Understanding Life Insurance
Part 3. The 7 Biggest Lies You’ll Hear About Life Insurance