Today I am going to talk to you about the benefits of whole life insurance and life insurance dividends.
If maximizing the benefits and cash value of your whole life insurance policy is important to you, this article is for you.
Whether you are new to purchasing life insurance policy or shopping for a new policy, this guide can assist you in better understanding your options.
I will break down what whole life insurance means for you and your family, the many benefits of whole life insurance, how life insurance dividends are taxed, dividend options, and how to decide if a whole life insurance policy is for you (chances are if you are reading this, it is).
This information is coming to you based on the experience and expertise in supporting people to build real independent wealth and freedom for over 5 years. Wealth Nation has already generated over $75 million for our clients with a financial system we call Lifestyle Banking.
- What is Whole Life Insurance
- Benefits of Whole Life Insurance Policy
- Cash Value and Tax Benefits
- Life Insurance Dividends
- How Life Insurance Dividends are Taxed
- Dividend Options
- Is Whole Life Insurance Right for you?
- Best Companies for Whole Life Insurance
What is Whole Life Insurance
Whole Life insurance provides permanent coverage for the insured person as long as premiums are paid on time.
Whole Life insurance lasts your entire life. Yes, you read that right, your entire life, unlike term insurance.
In comparison to term life insurance, where coverage for the insured person is limited to a certain time period, typically 10-30 years.
According to the Insurance Information Institute, Whole life insurance is the most common type of permanent life insurance.
Whole Life Insurance can be a great way to create cash flow, retirement income, finance a small business, pay off student debt, among many other uses.
The great thing about Whole life insurance is it allows you to create a sense of financial independence and freedom for yourself and your family.
If you are looking to apply for whole life insurance, you may have to complete a medical exam to determine life expectancy based on health tiers. Once you are assessed for health, your tier stays the same for the remainder of your policy which means the healthier and younger you are, the cheaper your policy may be.
There is a great benefit in obtaining whole life insurance at an early age where your health is at its best. This will allow you to qualify for a lower premium that will remain the same for the entirety of the whole life insurance policy.
According to Guardian, based on your life expectancy, the insurance sets four guaranteed benefits
- Guaranteed level premium: As long as you keep paying premiums, the policy will stay in effect.
- Guaranteed Death Benefit: the amount paid to your beneficiaries will never decrease
- Guaranteed Cash Value: A cash value that is guaranteed to grow at a set rate each year until it is equal to the face amount of the policy at a specified age, typically age 100 or 121.
- Guaranteed Endowment: The death benefit is guaranteed to be paid if the insured is still living at the age specified in the contract, typically age 100 or 121.
There are other permanent coverages out there, however, whole life has a great number of benefits, which will be discussed throughout this article.
These explanations of benefits will help you determine if whole life insurance makes sense for you and your family.
Cash Value and Tax Benefits to Whole Life Insurance
In addition to the permanent coverage that whole life policies provide, whole life insurance provides a cash value benefit to policyholders.
Every time you make a premium payment, a portion of your payment is put towards a savings portion of your policy called cash value.
With each payment, the cash value accumulates at a taxed free rate and can be utilized as needed and as you see fit. It’s completely up to you.
Whether it’s to pay off debt, use it as a down payment on a house, put it towards your retirement income, or to purchase more insurance with a higher death benefit to leave the family more money, the cash is yours.
The cash can be accessed either through a withdrawal or a loan. The benefits of accessing it through a loan is, it does not disturb the compound interest in the policy.
With a whole life insurance policy, after the policyholder is gone, the beneficiaries of the policy will receive a guaranteed amount of money.
Make sure to check with your whole life insurance agent to see what makes sense for your specific situation.
In addition to cash value accumulating at a tax-free rate, life insurance offers an income tax-free sum of money known as a death benefit.
Meaning, the beneficiary(ies) on the life insurance policy, receives the death benefit payment also without being taxed.
Life Insurance Riders
Riders are additional features and benefits that can be added to your policy for your specific needs.
Riders allow the policyholder to purchase more insurance or change policy conditions of future purchases.
One reason you may want to do this is to prepare for unexpected health challenges as one gets older.
Life insurance is much cheaper if you are young and healthy, so why not prepare before premiums get higher.
Having the option to purchase additional insurance earlier allows you to be prepared for unexpected life situations, such as terminal illness or chronic illness.
In this specific case, a portion of your death benefit can be utilized to take care of medical expenses while still living.
As always, please check with your insurance policy as rules and circumstances for riders vary by each policy and by each state.
Life Insurance Dividends
Dividends are the non-guaranteed returned portion of the premiums that are paid on your policy. If you work with a mutual insurance company, at the end of each year, insurance companies issue profits back to the policy owner in the form of a dividend payment.
The amount of the dividend payment is dependent on a number of factors related to the company’s financial status.
Dividends typically grow larger over time and are issued annually.
One of the main factors in determining the amount of the payment is the amount of cash value in a policy and the company’s financial performance during the fiscal year.
According to Northwestern Mutual “The ability to pay dividends is a result of efficient operations, careful risk selection, and successful investment management.”
Here is an example from a Northwestern Mutual policy explaining how annual dividends may be determined
Source: Northwestern Mutual
It’s helpful to do your research on companies who have consistently paid out dividends to their policyholders when deciding what company to go with for your whole life insurance policy.
This is one of the amazing benefits of a whole life insurance policy as you are in control of how to use your dividends which we will go into more detail, a little later in the article.
Using your dividends to create more financial security for yourself and your family and having autonomy in how that is done allows you to be in control of your whole life insurance policy and finances for years to come.
How Life Insurance Dividends are Taxed
Now that we have a better understanding of what dividends are, let’s talk about how life insurance dividends are taxed.
In the next section, I will discuss more in-depth the different types of life insurance dividends options, which also determine how they are taxed.
Generally speaking, however, there are some tax benefits life insurance dividends provide as the IRS sees them as a return of premium with after-tax dollars.
Because of this, dividends are typically not taxed unless the total dividends paid out exceed the total premium paid directly by the policy owner.
Therefore, accumulating dividends in a life insurance policy are taxable if the dividend payments exceed the premium paid to the policy.
Meaning, the policy owner can potentially take out of a policy the entire amount that they paid in premiums, and still have life insurance coverage, if done correctly.
Like cash value, this tax benefit allows financial independence, autonomy, and freedom and does not keep you stuck in a life insurance policy where there are terms and conditions to access your money.
Once again, always, always check with a tax professional if you need advice on your specific situation and your policy before making any decisions about how to best use your dividends.
When it comes to how dividend payments can be used, there are four options policyholders can choose from.
Each option has pros and cons and may affect both the long term rate of return on a whole life insurance policy as well as the death benefit ultimately paid to beneficiaries.
Each owner should carefully consider their options, the effect on the policy, the tax consequences of their decision, their current financial situation, as well as any anticipated or unanticipated future expenses for themselves and their family.
You can always ask your agent to run different scenarios for using the dividend payment so that you can make an informed decision on your different options.
This is your money, and your insurance agent is there to guide you in making these decisions.
Typically, you can also change your dividend option at any time throughout your whole life insurance policy.
Here are the 4 options for using your dividend payment in your whole life insurance policy.
- Paid directly to the owner
- Reduce Premium Payments
- Paid-Up Additional Life insurance
- Dividend Accumulations
Using Dividend Payments to pay cash directly to the policy owner.
The first option is using a dividend payment to be paid out directly to the policy owner on an annual basis. This can be used for any purpose the policyholder chooses.
Dividend payments help owners to obtain an investment return from the policy without accessing cash value and reducing the death benefit.
Opting to receive dividend payments directly does not reduce the death benefit or amount of the policy.
Dividend payments are different than a partial surrender or withdrawal which WILL reduce the death benefit or policy amount.
Remember, dividends are separately viewed as a rebate of premiums paid.
If you choose this option, your insurance company typically will issue you a check for the annual dividend amount, which will be mailed around your policy anniversary date.
Reduce Premium Payments
The second option is using the dividend to lower premium payments.
As the dividend payment grows over time, the policy owner will be obligated to pay less for premium payments out of pocket.
Eventually, the dividend payment may be sufficient enough to pay the entire premium and the policy can stand on its own.
If this is the case, any remaining dividend payments, (if any) over the premium payment due can be used for any of the other dividend options of the policyholders choosing.
This option makes sense for people looking to reduce their costs who also do not need the death benefit to grow over time.
If used to pay premiums the dividend is generally not taxable. Another tax benefit to consider.
Similarly to reducing premiums, dividends can also be used to pay off outstanding loans on a life insurance policy.
Keep in mind that while dividends can be used to reduce premium payments, if the dividend is not enough to pay the full premium due, the balance must be paid by the end of the grace period that is written into your policy.
Paid-Up Additional Life insurance
The third option is using the dividend payment towards the purchase of additional paid-up whole life insurance.
This will increase the death benefit for your beneficiaries and increase the growth rate of the dividend payment through the higher guaranteed minimum cash value growth.
You can do this either for the duration of the policy, or opt to do this for a certain period of time to achieve higher future dividend payments and insurance coverage.
You can then direct the dividend payment for other uses if you choose to do so.
This option is a great, great way to increase the growth of the policy and to increase your tax-deferred growth if you are using the policy as an investment.
Dividends will be used as premiums to buy additional level paid-up life insurance. This additional life insurance will be payable when the death benefit is payable.
According to Mass Mutual Insurance, Paid-up means that no further premiums are required on the additional life insurance. This insurance is participating, as well.
Paid-up additions may be surrendered for their value as long as they are not being used as collateral for certificate debt.
The fourth way that dividends can be used is by having them stored as cash by your life insurance holder.
Interest will be credited at the end of each certificate year.
Interest will be at an annual rate determined by the life insurance holder and will be compounded at the end of each year.
Dividend accumulations may be surrendered, as long as they are not being used as collateral for certificate debt.
This is a way to compound the growth of your financial returns, without having to purchase additional paid-up life insurance as discussed in option 3.
Another benefit to this option is the cash can be withdrawn easily, at any time, if you wish to access it.
Life insurance companies offer this option because they invest the cash that you store with them. They receive a higher rate of return than they pay to you.
It’s a win-win for policyholders and life insurance companies, but higher rates of return are generally available to owners if they search them out.
Another thing to consider with this option is that historically speaking, cash is extremely safe with life insurance companies.
I will always recommend speaking with your life insurance agent about your specific situation and the best options for you.
Remember you always have the option to change how you choose to use your dividends in your policy.
While there are many factors to consider in how to best utilize your dividends in your whole life insurance policy.
The important thing to remember is you can always talk to your agent about switching up your options.
Is Whole Life Insurance Right for you?
I have discussed the many benefits of whole life insurance. If you are still on the fence about if it’s right for you, here are some things to remember.
Whole Life Insurance provides a guaranteed return on money.
Whole Life Insurance provides cash value you can use before death
Whole Life insurance provides fixed premiums.
Whole Life insurance is for your entire life.
One way to start thinking about if whole life insurance is right for you is to consider your life insurance needs and goals.
Do you need something for a shorter time period? Need protection for a more short term, temporary need? Do you need something more permanent?
If you are in the business of guarantees, and who isn’t, whole life insurance may be the better choice for you.
According to Barry Flagg, founder of Veralytic, “Whole life insurance is a good fit for consumers with a low-risk tolerance seeking either lifetime coverage and/or tax-favored wealth accumulation,”
Another thing to keep in mind when deciding if purchasing whole life insurance is your income.
If you have a higher income and don’t have access to your other tax-deferred savings, whole life insurance can be beneficial for you.
In addition, if you have a lifelong dependent who will need care after you are gone, a whole life policy guarantees financial support for them without expiration dates or time-related terms.
When purchasing whole life insurance, remember that policies are very specific to your needs and life expectancy. The premiums are based on your life insurance needs and lifestyle, and there is not one specific cost.
Working with an insurance expert is the best way to determine the right plan for you.
Everyone has an opinion about whole life insurance and people will give you reasons for and against it based on who is in your social circle.
After all, is said and done, you are the only one who can decide if purchasing a whole life policy makes sense for you and your family.
I encourage you to work directly with a broker to determine the right path for you.
Best Companies for Whole Life Insurance
According to insuranceandestates.com, these ten companies are the best dividend-paying cash value whole life insurance companies.
- American United Life
- Lafayette Life
- Minnesota Life
- New York Life
- Ohio National
- Penn Mutual
According to Forbes.com, the top three whole life insurance companies include AXA Equitable, Northwestern Mutual, Ohio National.
This assessment was based on insurers using data provided by Veralytic, a leading publisher of pricing and performance research and competitiveness ratings for cash value life insurance products.
Whole life insurance can be a great option for many, many reasons.
Guaranteed cash value, fixed premiums, tax benefits, permanent coverage, what more could you need in a policy?
Wealth nation is here to support you in navigating whole life insurance to create a banking system and generational wealth for you and your family for years to come.
Whole life insurance allows you to be independent and creative with your financing.
While it does require you to play by a different set of rules, purchasing whole life insurance offers you and your family the rewards for many years to come.
It doesn’t have to be hard, or risky, creating financial freedom and wealth can be done by simply doing the math.
If you are looking for support or interested in learning more, check out the Wealth Nation Youtube channel and website.