In our last blog (Term Insurance Defined)
we talked about the basics of 10 and 20 year term insurance. This blog will
cover the basics of Whole Life Insurance.
Sometimes the need for insurance reaches far
beyond the need for insurance which arises when you want to cover the payment
of a bank loan, or a mortgage. In some cases the need for insurance is
permanent. In other words, your need for coverage will last your entire life.
As such, an insurance solution would
involve a “permanent” insurance product where the premium is affordable over a
long period of time. Permanent needs are often considered to be things like:
- Funds to pay income tax, which are triggered at death.
- To pay the capital gain on a family cottage at death.
- Sometimes cash is needed at death to even the distribution of asset payments to the family where otherwise selling property or a business might decrease its value
Regardless of the need, the long term
nature of a permanent policy and the ability to grow tax free cash make permanent insurance a financial tool not to be
overlooked.
Common types of permanent insurance are Whole Life, Universal Life and Term to
100. This blog will look at Whole
Life as a permanent solution and we will cover the other types in future
blogs.
Whole Life provides life insurance coverage
for one’s entire life, generally considered to be age 100. The premium
is a guaranteed level amount which is guaranteed level from the beginning, and
contractually required for the entire length of the policy. Premiums can be
stopped early in some cases if the policy is structured correctly one can even
start and stop premium payments to meet other demands in life.
The beneficiary can be named as a person, a
group of people, your estate, or even a corporation if you are incorporated.
Death benefits are always tax free to the beneficiary; and given various
circumstances, proper advice should be sought.
Whole life policies build cash value
inside of the policy which has the advantage of growing tax free. In other
words the policy owner does not have to pay tax on the growth while the cash
remains in the policy while the life insured is alive. This is a tremendous
advantage in today’s world of taxation. As a result when one has the need for
life insurance, and they want to create a pool of tax free growing wealth for
liquidity, retirement or generational transfer, Whole Life can be a valuable
tool in your financial portfolio.
Most Whole Life policies are (but not
always) a “participating” policy or
“PAR for short. An insurance company will receive all the premiums from all the
“PAR” Whole Life policies and manage the funds in a “PAR” account. Each year a
Whole Life policy receives a dividend (part of the profit from the “PAR”
account). This is where the expression “Participating” comes from, because you
participate in the profits of the PAR fund.
When received, a dividend is not taxable
which is a further tax advantage of a Whole Life policy. While the dividend may
be used in several ways, it is most commonly used to purchase additional pieces
of “paid up” insurance. Paid up insurance is a method of continually increasing
your insurance, and in turn, it also increases your cash value. You may also
elect to use your dividend to be paid in cash, to reduce a policy loan, to pay
your premiums, or to buy additional term insurance. Depending on your need for
insurance, your options can be designed to match your personal needs.
With respect to a guarantee, you will want
to be careful to what is guaranteed. The initial insurance amount, the premium
payment, and the cash value in the initial insurance policy can be guaranteed.
This provides a great deal of security. A dividend on the other hand is rooted
in the performance of the “PAR” account and can increase or decrease based on
the performance of the PAR fund, and the expenses or running the PAR fund. Once a dividend is declared (paid to the
policy) it becomes guaranteed.
A very common form of Whole Life is when
the insurance company compresses ones premiums into a shorter time frame. For
example, a Whole Life premium which is contractually required to age 100,
can be compressed into 20 years. In
this case, if a client starts a premium at age 30, they can pay a premium to
age 50, at which time all premiums would become “paid up”. When doing this, the annual premium for this
type of policy are higher than a traditional Whole Life policy, but there is a
guarantee to stop premiums in 20
years. This can be an advantage for retirement, budget, and cash accumulation.
When premiums stop, the insurance can remain in force for ever. The cash value
in this type of Whole Life policy is also larger than a traditional Whole Life
policy due to the accelerated premium.
Owing a Whole Life policy can offer many
advantages. A properly balanced portfolio is often determined based on many
personal factors. Owning a combination of different types of polices including
Whole Life and Term insurance is common. Your place on your “Financial Path of
Life” will influence what is best for you.
If you are in Nova Scotia, Canada, and wish
to receive some insurance advice, please contact Corry Collins CLU CHFC CFS. 902-444-7000
or corry@maritimewealth.com
If you are in Canada or the U.K. and wish to ask me to speak at your event, please contact Corry Collins CLU CHFC CFS. 902-444-7000 or corry@maritimewealth.com
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