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Whole life insurance benefits and rewards.
Whether you are anticipating an eventual market crash or even a collapse of the economy, whole life insurance is one particular insurance product that should occupy your toolbox for financial survival.
Not just survival, although the benefits are stellar, but also a solid financial planning tool that offers rewards that significantly provide an ROI.
Whole Life insurance comes with numerous benefits that can easily finance a planned retirement:
- Guaranteed cash (wealth) accumulation
- Tax-free loans that will not disrupt compounded interest earnings
- A guaranteed death benefit
- Dividends, dividends, and dividends
Some refer to whole life as a financial planning Swiss Army Knife that is forever useful and in this article, we’ll explain why this comparison is 100% on point.
About Whole Life Insurance
As its name implies, whole life is an insurance product intended to provide protection for one’s whole life. Compared to term life insurance which is temporary and only provides a benefit to your beneficiary, whole life insurance offers substantial benefits to the policyholder while he or she is living.
Yes, your premium will be substantially higher than term life insurance, but unlike whole life, term insurance coverage eventually goes away.
With whole life insurance, a portion of the periodic premium covers the cost of insurance, and the remainder of the premium is invested in a cluster of conservative fixed-income investments that are managed by the company.
Whole Life’s Living Benefits
The cash account built into a whole life insurance policy consists of two parts:
- A guaranteed value that is actually a return of the policyholder’s paid premiums over time.
- A non-guaranteed value that represents the guaranteed value and the annual dividends paid by the insurer (a mutual company).
This coveted cash value is owned by the policyholder and can be accessed by the policyholder at any time and for any reason. The policyholder also has the option to repay the loan or not repay the loan because any unpaid loan(s) will be deducted from the death benefit when the policyholder dies.
For example, let’s say Mr. Policyholder takes a policy loan from the insurance company, the cash is not deducted from the policy, but rather, collateralized. The collateralized funds continue to earn interest. But, and most importantly, the funds from the loan are tax-exempt because after all, it’s not income, it’s a loan.
If Mr. Policyholder repays the loan plus the interest on it, the full death benefit will be paid to the beneficiary when Mr. Policyholder dies. If Mr. Policyholder does not repay the loan and the interest or only repays a portion of it, that amount will be deducted from the death benefit.
Moreover, the interest on the loans is significantly offset by the earnings on the collateralized funds that remain in the cash account.
Dividends, Dividends, and Dividends
When you purchase a participating whole life policy from a mutual insurer, you will likely earn dividends from the company which is actually returned premium.
Although these coveted dividends are never guaranteed and can fluctuate from year to year, you can easily confirm whether the company you are considering has a history of paying dividends (why would you not check this out?).
Moreover, since dividends are considered a return of premium, they are not taxed no matter how you use them (more about dividends later). Additionally, depending on the terms of your policy, dividends may not be affected by outstanding policy loans from the carrier.
Dividend Options for the Policyholder
Typically, a mutual insurance company will allow the dividends to be used in six different ways:
- Purchase paid-up additional life insurance – Paid-up additional life insurance, the policyholder benefits by increasing the death benefit of the policy and increasing the cash value account because the insurance purchased with dividends earns tax-deferred interest.
- Reduce annual premium payments – This option allows the policyholder to reduce his or her annual premium payment by the amount of the dividend payment. For example, if your annual premium is $1,500 and your dividend is $600, the annual premium for the following policy year would be $900. If your dividend exceeds your annual premium, you can request that the excess be applied in another dividend option.
- Paid in Cash – If this option is selected, the insurance company will issue a check to you for the dividend amount shortly before your policy’s anniversary date.
- Applied to an outstanding loan – If you have an outstanding policy loan, you can select this option and the insurer will apply the dividend payment toward your loan.
- Accumulate at Interest – Selecting this option directs the insurer to hold your dividends to earn interest at a specified rate. You do have the option to withdraw these funds whenever you wish and the withdrawal will not affect the guaranteed cash value or death benefit in your policy.
- Reduce the number of premium payments – This option allows a policyholder to use non-guaranteed policy values, including annual dividends, to pay future premiums.
The Whole Life Policy’s Battery of Benefits
Although we went a little long on dividends (and rightly so), the battery of benefits provided by whole life insurance are:
A Savings Solution
Regretfully, most of us would rather spend than save (our government is a good example) and most of us rely on our employer to divert funds into a company retirement account that is subject to government constraints.
By incorporating whole life insurance into our retirement planning, we are implementing a disciplined way to save for retirement and reducing our tax liability when the time comes to dip into our savings.
Long Term Protection
Since the majority of us carry debt with us into retirement, it makes good financial sense to have insurance coverage for a lifetime. Yes, term insurance is substantially cheaper to cover debt while we are accumulating it.
But, when you consider that whole life insurance provides lifetime protection along with a tax-efficient way to create a stream of income for retirement, it is the better solution for the long term.
Using various optional riders attached to your whole life insurance policy will allow you to take policy loans or receive an advance on the death benefit to cover life events such as costs associated with a terminal or chronic illness and long-term care expenses.
These life events can be financially devasting unless there is access to sufficient funding to cover the unexpected costs that most individuals have to deal with over a lifetime.
Tax Efficient Retirement Plan with No Government Constraints
Using whole life insurance in retirement planning allows us to accumulate the wealth needed for retirement income that will be tax-exempt. The constraints that are attached to traditional retirement plans such as an IRA and 401(k) are not attached to your whole life insurance policy.
When it comes time to rely on an income stream from your policy, you simply do so by using policy loans that are tax-exempt and not required to be repaid since they will be deducted from the death benefit.
The Bottom Line
If you are concerned about the future of the markets or the economy as a whole, you’re not alone. All indicators suggest that our taxes could double to make up for the uncontrolled spending by our government.
Regrettably, elected officials can spend money we don’t have, and at the same time, place constraints on how we can save for the future.
Rather than fret about what’s over the horizon, take the necessary steps now to ensure that your retirement will be a blessing rather than a curse.
Make no mistake. As the saying goes, “the tax man cometh.” Will you be prepared?
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