How does whole life insurance work – and what can it do for you?A whole life insurance policy – in a very literal sense – is more than just life insurance. It’s a versatile financial instrument that helps protect families and businesses from uncertainty while helping them build and enhance wealth. If that’s important to you, this article can help answer key questions, including: Show
What is a whole life policy, and how does it work?Whole life insurance is, first and foremost, permanent life insurance protection that lasts your entire life; by contrast, term life insurance only covers you for a specific number of years. While there are other kinds of permanent coverage, whole life is the simplest. A whole life policy also has a “cash value” component – a life-long financial asset. Because life insurance protection is considered beneficial to society, it has been given tax benefits you won’t find with many other financial instruments.1 Every whole life contract is unique to the person insured, taking into account their mortality risk, desired coverage level, and optional features (for example, a cost-of-living adjustment rider).2 When you apply for a whole life policy, there’s an underwriting process in which you may undergo a medical exam. Then, based on your life expectancy, the insurer’s actuaries set four guaranteed values 3:
A policy’s cash value can provide numerous benefits that you can use while you’re still alive. It can take time for it to grow into a useful amount, but once that happens, you can borrow money against your policy’s cash value, use it to pay premiums, or even surrender it for cash in retirement.5 Whole life policies can also earn dividendsIf you purchase whole life from a mutual insurance company, such as Guardian, the cash value portion can also earn annual dividends 6 , which can increase your cash value beyond the guaranteed rate. While there’s no guarantee that dividends will be declared each year, Guardian has paid them every year since 1868, even during wars, pandemics, or stock market turbulence. Depending on your needs, you can opt to use your dividends in different ways. One option is to purchase paid-up additions (PUAs).7 A PUA is guaranteed permanent, paid-up life insurance. This can provide you with a growing cash value and a death benefit that is guaranteed once purchased. Over time, the compounding accumulation of PUAs can help to offset the effects of inflation by providing a higher death benefit and cash value. Dividend accumulations can also be withdrawn tax-free, up to the policy basis (i.e., the sum of premiums paid to date). In addition to purchasing PUAs, Guardian offers policyholders these dividend options:
Here’s how the death benefit of a whole life policy can grow with paid-up additional insurance purchased by dividends. Protection from taxesLife insurance contributes to the welfare of society by providing protection for surviving family members, so it is given the following tax benefits:
What are the different uses for whole life?Whole life insurance gives families – and businesses – a way to protect themselves from the loss of a person whose economic contributions would be difficult or impossible to replace. It can also provide several other financial benefits. Human life value protectionMost people see the importance of insuring the value of property, such as their home or car, so they purchase casualty insurance. The human life value 8 of an individual – one of the most valuable assets of a family or business – is also insurable. Whole life provides an effective way of permanently protecting a family or business against the loss of its most valuable asset. Family protectionThe death benefit of life insurance can help ensure the economic continuity of a family when it is faced with the death of a loved one, by helping provide funds that can be used for:
Business protectionBusinesses looking to create a business continuity strategy in the event of the death of a partner or key employee have special insurance needs. Whole life can be used to help provide the capital needed to buy the interests of a deceased owner and indemnify the business against the loss of the services, expertise, and skills of a key person. Life insurance can help address four major areas of business strategies:
Estate planning strategiesPlanning for the orderly transfer of property at death can help to minimize taxes and provide for heirs in a way that reflects your desires. Whole life can play a vital role by offering:
Asset utlizationOne of the unique benefits of whole life insurance is the way that it can help enhance the value of other assets in your estate. It can enables the policy owner to use estate assets in ways that might not be possible otherwise. For example, it can be the "permission slip" that lets you utilize other aspects of your retirement income and personal net worth. It can give you the power to spend assets that may not otherwise be utilized. A whole life policy may also serve as the basis for a charitable remainder trust. If you’ve built a successful business or investment portfolio, there can be capital gains taxes incurred when those are sold for retirement income. At the same time, you may want to support charitable causes that reflect your interests. With a charitable remainder trust, these two diverse needs can come together in a plan that may provide:
This can help make it possible to achieve your charitable goals while maintaining a legacy for your heirs. What are the benefits of whole life insurance?
Distribution: If properly executed, life insurance helps avoid probate and can provide beneficiaries with greater privacy than may be afforded by a will; a will becomes public once probated, whereas death benefit distributions are typically private, contractually driven transactions.
Read more about the benefits of whole life insurance. What are the different types of whole life policies, and what do they cost?Features, provisions, and costs vary from one insurer to the next, and each whole life contract is unique to the policyholder. Generally speaking, there are two basic types of payment structures for whole life:
Riders to customize a policy to your needs – now and in the futureRiders are optional provisions that can add flexibility and extra value to a policy while letting you tailor your coverage to your needs. In addition to the Waiver of Premium rider mentioned above, some other options offered by Guardian include:
Now that you know how whole life works, how do you get a policy that works for you?A whole life insurance policy is one of the most important financial purchases you can make. You want to consider getting it from a company with financial strength 13. There are reliable, independent sources for financial strength ratings, such as A.M. Best, Moody’s, Standard & Poor’s and Fitch. Discuss your situation with an insurance professional or financial professional who understands whole life insurance and can guide you to the solution that best meets your needs. If you don’t know such a professional, ask a friend or colleague for a recommendation. Or, Guardian can connect you to a financial representative who can help. Need some help?Find a financial professional near you who can help Frequently asked questions about how whole life insurance worksCan you cash out of a whole life insurance policy?Yes. A whole life policy has cash value that grows over time. You can cash it out to help pay for retirement, or borrow against it at any time, for any reason.5 What is cash value in whole life insurance?Whole life policies have a component referred to as the policy’s cash value: A portion of your premium dollars can grow over time on a tax-deferred basis, so you don’t pay taxes on the gains. What are the pros and cons of whole life insurance?Whole life insurance is the simplest form of permanent life insurance, with guarantees for the death benefit amount, premium costs, and cash value growth. Compared to universal life (another form of permanent coverage), whole life typically offers more guarantees but less payment flexibility. Compared to term life, whole life offers life-long coverage and cash value; but the cost for a given level of death benefit is typically higher. What happens when the cash value of a life insurance policy equals the face value quizlet?What happens when the cash value of a life insurance policy equals the face value? The policy endows or pays out.
Is cash value of life insurance the same as face value?Although they sound similar, the cash value and face value within a life insurance plan are very different. The cash value functions like a savings account that the policyholder may be able to borrow from in a loan. This account is tax-deferred so it tends to grow at a steady rate.
What does face value on a life insurance policy mean?The face amount, or face value, of a life insurance policy, is the amount of money an insurer will pay out to beneficiaries if the policyholder passes away. For example, if you buy a $100,000 life insurance policy, the face amount of that policy is $100,000.
What happens when cash value equals death benefit?Increasing death benefit: This is also known as option B or option 2. In this case, the death benefit increases as the cash value does. This death benefit equals the cash value plus the death benefit your policy was issued with. Your beneficiary does receive the cash value in this case.
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