Whole Life Defined

Sometimes the need for insurance coverage 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.
• ·         A permanent policy may help fund a charitable gift which would in turn decrease overall taxes. (Estate planning is an entirely other issue which will be covered in another blog.)

Regardless of the need, the long-term nature of a permanent policy and the ability to grow tax free cash makes 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 Insurance 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 inside 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 regarding 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 is higher than a traditional Whole Life policy, but there is a guarantee to stop paying 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.

Owning 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 advice, please contact Corry Collins CLU CHFC CFS. 902-444-7000 or corry@maritimewealth.com