Whole Life Insurance Advice

Whole  life insurance, which is permanent insurance that remains in force for the  entire life of the insured, has a cash value component. Part of the premium,  regardless of whether is it paid in installments or as a single lump sum, is  invested. Earnings grow tax-deferred for the life of the insured.

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Whole Life Insurance as Retirement

For  these reasons, whole life insurance can be used not only as an insurance  vehicle, but also as a way to build retirement savings and help with estate  planning. The  premiums paid by the insured can be significantly higher than those paid for  other types of insurance. But, a whole life policy that remains in force for  the life of the insured, especially one that is purchased early in adulthood,  can be much more cost effective than a term or universal life policy.

Because  it is part insurance product and part investment product, a whole life  policyholder must exercise financial discipline over the years. With the  exception of a single premium policy, premiums must be paid according to the  schedule or the policy will lapse. Should the policy lapse, the policyholder  will only have access to a limited portion of the cash value. And, maybe more  importantly, he or she will lose the death benefit that would be paid to the  beneficiary. But, for those looking for an insurance option combined with the  ability to increase and investment, a whole life insurance policy will provide  the following benefits.

Choosing the Right Whole  Life Policy

There are six primary types of whole life insurance from which to choose:

Participating  Whole Life

A participating whole life policy “participates” in the financial success of the  insurance company. The insured can choose to take the dividend as cash, add it  to the cash value of the policy or use it to pay the premium.

Because  the earnings on a whole life policy grow tax-deferred for as long as the  insured pays the premiums, this type of policy can be a good way to accumulate  money for retirement. The growth that can be achieved happens more quickly as  more money is retained within the account to compound over a number of years.

Non-Participating Whole Life

There is no dividend paid on a non-participating whole life policy. However, the  costs remain fixed for the life of the insured and premiums are lower than a  participating policy.

Level Premium Whole Life

As the name implies, premiums, which are paid in installments throughout the life  of the insured, remain level.

Limited Payment Whole Life

Rather than paying premiums for life, a limited payment whole life policy allows the  insured to pay the premiums for a set number of years.

Single Premium Whole Life

One lump sum premium is required to purchase a single premium whole life policy.  This kind of policy is more often used as an investment strategy or as part of  estate planning. A single premium whole life policy can also be purchased in  place of a single premium annuity. One of the best features of a single premium  whole life policy is that equity is immediate. The policyholder does not have  to wait years or even months to use the policy as collateral or to borrow  against it.

Intermediate Whole Life

The premiums on an intermediate whole life policy are flexible.

Whole Life Insurance  Level Premiums

Unlike  term life policies, most whole life insurance polices offer level premiums. The  premiums remain level and fixed each year. They do not increase as the insured  gets older.

What  does change over time is the amount of the premium that is applied to the  insurance portion of the contract and the portion that is applied to the investment portion. As the insured ages, the portion that goes toward the  insurance increases because the probability of paying the death benefit  increases.

Borrowing Against a  Whole Life Insurance Policy

Provided  there are sufficient funds within the account, a whole life insurance policy  can be borrowed against or used as collateral for a loan. While each life  insurance company offers different restrictions and terms, the availability of  funds can be quite helpful in the event of a job loss or other financial  emergency. Not only can the policy owner borrow money, he or she can pay the  premiums from the cash value portion of the policy in order for it to remain in  force.

A  whole life policy can also be surrendered for the cash value. While the  policyholder may not be able to retrieve the entire built up cash value, he or  she can still surrender the policy.

Whole Life Insurance and  Retirement Savings

Interest  and earnings on a whole life policy grow tax deferred until the policy owner  either surrenders the policy or the beneficiary receives the death benefit.

Many  people choose to purchase whole life insurance policies as part of a retirement  plan. Not only do the get the benefit of insuring their loved ones from  financial hardship, the cash value portion of the policy acts as a safety net.

Avoiding Excessive  Estate Taxes with Whole Life Insurance

It’s  always important to seek the advice of a tax professional prior to using a  whole life policy as a method of estate planning. However, in general, if  executed properly, a whole life policy can avoid excessive estate taxes.

The  accumulating cash value of a whole life policy is not taxable under current  federal tax guidelines. In addition, the dividends paid to the insured are  considered to be the return of premium and are also not taxable as long as they  are not higher than the premiums that have been paid in.

The  death benefit of a whole life policy provides a payment to the beneficiary that  is not taxable. However, if the insured owns all or part of the whole life  policy at the time of his or her death, the value owned might be included as  part of the overall estate. This will trigger not only federal estate taxes but  also, more than likely, state inheritance taxes.

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