By Daniel Stewart
Properly designed and implemented, modern whole life insurance is a powerful financial tool that can help you pay down debt more quickly, manage your cash with greater efficiency, and help you save on taxes.
Indeed, term policies are typically less expensive than permanent (whole or universal life) insurance contracts. However, more Americans than ever choose permanent life insurance because it offers certain advantages that may provide cash or offset the cost of premiums over time.
Depending on the coverage chosen, your permanent policy may also pay you regular dividends based on interest rates, investment returns, and the financial successes of the issuing company.
What are insurance dividends?
Like traditional investment dividends, insurance dividends are a regular return of company profits to shareholders. This money is distributed as cash, used to lower premiums, or may allow the policyholder to purchase additional insurance through what are known as “paid-up additions,” (PUAs.) It’s crucial to understand that dividends are not always guaranteed and that the higher the dividend, the more expensive your policy will be.
You can often offset many of the higher initial costs of whole life insurance with regular contributions to your policy.
Generally, the dividend amount offered depends on how much you pay into the policy. For example, if your policy is worth $100,000 and provides a 3% rate, your dividend will be $3,000 for the year. If you were to add another $4,000 to your policy the following year, you would get $120 more, for a total of $3,120 next year.
What are some benefits of dividend-paying whole life insurance?
As mentioned, whole-life contracts may offer either guaranteed or non-guaranteed dividends. It’s essential to review any plan you are considering carefully before purchasing to ensure that you’ll have guaranteed premiums. Choosing a non-guaranteed option means there’s a risk your cash value won’t grow the way you need it to grow.
It would be best to look at the issuing company’s credit rating, which should be A or higher. High ratings often indicate how sustainable dividends will be now and in the future.
In addition to the potential to grow your cash value through dividends, whole life insurance offers other attractive benefits.
Whole life is a type of permanent insurance. A whole-life policy usually stays in force if you keep paying the premiums.
That means whole life insurance protects you as long as you live and gives your beneficiaries tax-free death benefits.
You have a cash value account that builds over time.
When your policy is designed correctly by a qualified insurance specialist, it can grow significantly over time. Every time you pay the premium on a whole-life policy, some money goes to pay the cost of your policy while a portion is set aside in a cash account. You can then use loans against that value to pay off debts or purchase high-ticket items. Permanent life policyholders often use their funds to bypass traditional finance companies and banks. They pay themselves the interest they’d usually accrue on purchases such as automobiles, business equipment, or even homes. Employing such a strategy can create exponential growth in cash accounts.
Whole life insurance offers attractive features, such as:
- Level premiums — The premiums you pay remain the same for the life of your policy, regardless of your age or health.
- Death benefits — Your beneficiaries receive the face amount of the policy upon your death. However, any outstanding cash value loans and interest will reduce the death benefit.
- Cash value — Your cash value will grow each year, tax-deferred. You also have the option of borrowing against your policy’s cash value.
A whole life policy might be right for you and your family if:
- You’re looking for life insurance that you can’t outlive.
- You need life insurance as a cornerstone of your long-term financial plan.
- You want the opportunity to build cash value.
Deciding on the type of life insurance you need doesn’t have to be complicated or intimidating. Armed with essential information, you can clarify your needs and goals and have a productive discussion with your financial planner. Please contact me if you’d like to discover other ways to safeguard your wealth against destructive forces such as inflation, taxes, and longevity or if you have questions about your situation.
