Participating Whole Life Insurance: Benefits, Uses, and Key Considerations

Finding the right insurance policy for your unique needs and objectives is a difficult task. If you are in the market as a first-time buyer of participating whole life insurance and are researching how whole life insurance functions, its uses and its benefits, this article will walk you through it.

What is a Participating Whole Life Insurance Policy?

Participating whole life insurance policies have the basic goal of providing your beneficiaries (e.g., family, business partners, charities) with a tax-free death benefit upon your passing.

To fund the policy, premiums are paid for a fixed period such as 10 or 20 years, but it is most commonly paid over the full duration of the policy. These policies also include an investment component, which is known as the cash value.

Participating whole life insurance policies provide that the policy owner “participates” in an insurance company’s performance in the form of dividends. In its most common form, dividends are used to add to a policy’s death benefit and cash value. Dividends can alternatively be withdrawn in cash, used to pay for premiums or held on deposit with interest by the insurance company.

The dividend amount credited to the policy owner is based on an insurer’s dividend scale, derived from many factors such as the insurance company’s participating policyholder mortality experience and the insurance company’s participating fund’s investment performance.

Questions to Ask Before Buying a Whole Life Insurance Policy

The first step when considering buying a whole life insurance policy is to determine the goals and requirements of the policy. A few examples are below. 

What Will I Use My Whole Life Insurance Policy For?

Transitioning a Business

If you are a business owner, a common concern is what happens to your business when you pass. To remove all uncertainty regarding your business upon death, a buy-sell agreement can be drafted to ensure that your business is seamlessly transitioned to your trusted business partners. A whole life insurance policy on your life owned by your business can fund this buyout.

Alleviate Familial Financial Burden

Another priority can be to ensure that your family is financially secure at the time of your passing. Whether the death benefit will cover outstanding debts, taxes or lost income, a whole life insurance policy will help.

Income or Investment Purposes

For the income-focused client, participating whole life insurance can be used as a distinct asset class or a source of tax-advantaged income. The policy’s cash value grows just like any other fixed income investment but on a tax-advantaged basis. This cash value is available to be drawn upon during retirement, financial emergencies, or for supplemental income.

What are the Required Characteristics of My Life Insurance Policy?

Requirements are highly personal to you, and the following list can help you determine your essential needs:

• Lowest cost (premiums).
• Highest death benefit at life expectancy.
• Highest cash value at life expectancy.
• Highest internal rate of return on your premiums.

Will I Pursue Financing to Fund the Policy’s Premiums?

It may not be common knowledge that you are able to use financing to pay your life insurance premiums. There are two common types of financing: 

1. Borrowing an amount that is the lower of the annual growth in cash value and premiums.
2. Borrowing the full premium amount every year.

In the first financing arrangement above, the growth in cash value will outpace premiums after a certain period, meaning that premiums are fully funded after this point. Before this point, a material portion of the premium is funded.

In the second financing agreement, the full premium is borrowed and funded, regardless of cash value.

There are many reasons to pursue financing, including:

1. Maximized life insurance coverage: financing enables you to afford a larger policy.
2. Increased cash values: a larger policy implies a larger gross cash value.
3. Increased flexibility: invest what would otherwise be the insurance policy’s premium payments into the business.

Conclusion

Participating in whole life insurance fulfills many objectives such as financing buy-sell agreements, covering estate taxes, providing retirement or supplemental income, and replacing income at death. When shopping for a policy, it is recommended that you determine your goals and objectives to determine the optimal policy.

If you are interested in learning about how you can use participating whole life insurance to achieve your goals, schedule a call with our team!