Whole Life Insurance Advantages
Whole life insurance, also known as cash value life or permanent life insurance, is designed to provide lifetime coverage and offers a guaranteed accumulation fund that grows tax deferred. Whole life insurance offers many advantages including guaranteed premiums and death benefits, guaranteed cash values that grow tax deferred, dividend earnings potential and tax free income at retirement.

	Guaranteed premiums and death benefits
	Guaranteed cash values that grow tax deferred
	Potential to earn dividends
	Tax free income

Guaranteed premiums and death benefits

The contractual guaranteed premiums and death benefits of ordinary whole life insurance make it the safest most conservative type of life insurance. With permanent life insurance, as long as the guaranteed premiums are paid, the coverage will always remain in effect and can never be reduced, cancelled or terminated by the insurance company. Additionally, there will never be any premium increases associated with traditional whole life insurance.

The guarantees found with permanent life insurance are not available in many of the other types of life policies. With term life and nearly all universal life, insurance costs eventually increase requiring additional premium payments. Over the long term, these premium increases become cost prohibitive and many policyholders will cancel their policies prior to death. Ordinary life may cost more than other types of life insurance, but coverage is guaranteed for life as long as premiums are paid. The premium and coverage guarantees of whole life insurance are a distinct advantage over every other type of life insurance.

Guaranteed cash values that grow tax deferred

Along with guaranteed premiums and death benefits, whole life insurance polices also build guaranteed cash values that grow tax deferred. In fact, whole life is commonly referred to as “cash value” life insurance. Cash value growth depends on several factors including the policy’s face amount, the amount and duration of the premium payment and how long the policy has been inforce. As a general rule, the longer the policy has been inforce, the larger the cash value growth. This is due to the sales charges and policy expenses that are significant in the first few policy years.

Potential to earn dividends

Along with guaranteed cash values, permanent life insurance may offer the potential to earn policy dividends. With participating whole life insurance, after all claims and expenses of the insurance company have been paid for a given policy year, the company may redistribute to its policyholders any surplus. This surplus payment is known as a policy dividend and is considered to be a return of excess policy premiums. They are not guaranteed and there are no income taxes due on life insurance policy dividends.

There are several dividend options available to policyholders. These options include taking the dividend in cash, using the dividend to reduce premiums, accumulate dividends with interest, or using the dividend to by paid-up insurance. Using the dividend to buy paid-up insurance is an especially attractive option because it creates additional insurance that leverages potential future dividends. Other dividend options may be available depending on the insurance company.

Tax free income

Cash value life insurance policies offer significant tax advantages including the ability to access cash values in retirement tax free. If the policy is structured properly, cash values may be accessed tax free via withdrawals or partial surrenders up to the basis of the policy. The policy basis is the total amount of policy premiums paid to date. Any withdrawal or partial surrender up to the basis is nontaxable. However, any withdrawals beyond the policy basis are taxable.

When policy withdrawals equal the premium basis, a policy loan can be used to access cash values. Policy loans are not taxable as long as the policy remains in effect. As long as the policy maintains enough cash value to pay premiums, taxes may be avoided. Interest does accrue on the loan but does not have to be repaid. If the loan is not repaid, the total loan balance including accrued interest will be reduced from the policy face amount at death. If however, the policy lapses due to lack of cash to pay policy premiums, all cash received from the policy in excess of the policy basis will be subject to income taxes. For more information on taxes and life insurance see, "Life Insurance Tax Advantages".

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