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As oppose to term life policies that are temporary in nature, whole life coverage is designed to build cash value each year and last a lifetime. Cash value will build up over time and can eliminate the need for ongoing premiums in some cases.
The most common whole life policies are traditional (level term), interest sensitive, and single premium. We can illustrate all types depending on which plans fit your needs best.
There are several advantages to whole life coverage when compared to other non-permanent policies. Consumers appreciate that this coverage can reduce taxes, builds cash value, needs to be medically underwritten only once, provides flexibility, and can offer an accelerated death benefit in times of need.
When funded properly, a whole life policy will increase in cash value over time. In this way, the policy pays a dividend to the insured and eventually the policy can be paid-up. In other words the policy pays for itself and no further premiums are due. It is a common misconception that premiums must be paid for the life of the insured.
It is also important to note that policy owners can borrow against the cash value should the need arise. These low interest loans can be helpful in times of need, but can also provide tax advantages when withdrawn correctly.
Many newer life policies also offer an accelerated death benefit. The insured can access the entire death benefit in a short amount of time to help pay for a chronic illness. Hybrid whole life insurance plans go a step further and pay benefits in the same manner a traditional long term care policy would.
Whole life policies can reduce and/or avoid federal and state income and inheritance taxes at death. They are a preferred estate planning tool.
The cash value grows on a tax-deferred basis and at passing, policy beneficiaries can collect the death benefit free from federal income taxes. (Your individual state tax rules can vary, but life policies often avoid state inheritance and estate taxes when used properly.)
There are very few assets that offer the tax benefits of a whole life policy. High net worth individuals and business owners will often use permanent life insurance plans to account for estate taxes as well as business succession planning.
Families might purchase a second-to-die policy as part of an irrevocable funeral trust (ILIT), while a business will purchase a key person life plan to maintain stable business activities should a proprietor pass away. And almost all final expense policies sold and purchased are permanent in nature due to the guarantees provided by such plans.
Policy owners also have the flexibility to transfer the cash value to a paid-up policy through a 1035 tax-free exchange. Should the owner wish to keep the life coverage while also protecting its tax deferred status, then the entire cash value can be exchanged tax-free for a paid up policy. This strategy will avoid future premium payments.
Permanent insurance will usually illustrate two values; one that is guaranteed and one that is not. The guaranteed value will show growth by a fixed interest rate (say 3% for example) for the life of the policy. Think of this value as the minimum performance of the policy as guaranteed by the insurance company in a worst case scenario.
The non-guaranteed value is one that is usually based off the past investment performance of the company (say 4% for example) and is the expected interest crediting amount going forward. While not guaranteed, almost all life carriers credit interest at a higher rate than the minimum guaranteed value.
Life insurance policies may also be referred to as participating or nonparticipating. Participating contracts allow the insurance company to share the profits with the policyholders in the form of a yearly refund or dividend. These are non-taxable distributions as they are considered an overcharge of premium by the I.R.S. Most policies sold today are participating.
Non-participating contracts typically do not pay dividends and the death benefit, premiums, and surrender values will not change during the life of the policy. The insurance company keeps any over-payments while also maintaining responsibility should claims be higher than expected.
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We work with the leading, highly rated providers in order to illustrate dependable plans for individuals, families and businesses. Contact us today!