Two main types of life insurance — term life and permanent

The next thing to know is that there are two main categories of life insurance: term life, and permanent life insurance — of which the most common form is whole life insurance. Term life insurance buys protection for a specified period of time (term) — from 10-30 years, your choice at the time you purchase it. The second major type of life insurance is permanent life insurance, and it takes financial protection a lot further. A whole life insurance policy, the most common form of permanent life insurance, guarantees that your coverage will never end as long as your premiums (your monthly payments to the insurance company) stay current.1 Beyond the guaranteed life insurance protection, whole life has an important feature — a savings component. With whole life, you accumulate  cash value tax deferred2, 3. The cash value accumulates over time and can become a significant financial asset that can be used during your lifetime in a number of ways. 

What is the primary purpose of building a cash value?

The cash value in your life insurance policy can be withdrawn or borrowed against, and there are several different approaches when deciding which way to use the money.4 You may be able to get a bank loan by using your policy’s cash value as collateral or borrow against the policy’s cash value to put a down payment on a house. Or you may want to withdraw money from the policy to help pay education costs. This would ultimately affect the amount of money you would be leaving to your heirs or beneficiaries (these could also be a charity or other non-profit, for instance). Talk to your financial professional, as well as a tax advisor, to determine which choice would be best for you.

Other important features of whole life insurance

Whole life insurance is tax-efficient — which means it helps your money grow faster because the interest earnings within the account aren’t taxed. If you buy your policy from a mutual insurance company, you may also receive annual dividend payments based on the financial performance of that company each year.3 These dividend payments aren’t guaranteed, so check on the track record and the current financial ratings of the insurance company before you purchase. Some companies pay dividends year after year, and they can add up in your account. Whole life insurance also has a guaranteed level premium, meaning that the monthly payments you make won’t increase over time. So while whole life insurance costs more in the early years, in the long run, the payments may seem like a remarkable deal for life insurance that can’t be canceled by the insurance company, regardless of how old you get or whatever occurs to affect your health. 

Withdrawing or borrowing against your whole life insurance cash value

There are several approaches when deciding on withdrawing versus borrowing.4 You may be able to get a bank loan or a mortgage by borrowing against the cash value account as  guaranteed collateral. Or you may borrow or withdraw the money from your own policy, depending on whether or not you wish to pay the money back. This would ultimately affect the amount of money you leave to your heirs or beneficiaries (which could be family members or a non-profit). Talk to your financial professional, as well as a tax advisor, to determine which choice would be best for you. 

Make sure your insurance company is stable

Make sure to buy from a reputable life insurance company. Check out how long they’ve been in business and their financial ratings.Several independent companies, like Moody’s Investors Service, Fitch, and Standard & Poor’s rate companies in terms of assets, how they’re run, and whether they’re at risk, and these ratings can be found easily online.6 For many reasons, you want the insurance company you choose to have high ratings, not just for your life insurance coverage, but also to make sure your cash value keeps growing securely. Remember, once the cash value in your account has built up, you could use it to do a number of things during your own lifetime. You can pay your policy’s premiums.7 You could grow the amount of money awaiting your beneficiaries. A whole life policy can give you options to fit your lifestyle and the kind of life you see ahead of you.

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Disclaimer

1

All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2

Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

3

Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

4

Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

5

Tips for Choosing the Right Insurance Company. Retrieved from https://www.lifehappens.org/tips-for-choosing-the-right-insurance-company/

6

How to assess the financial strength of an insurance company. Retrieved from https://www.iii.org/article/how-to-assess-the-financial-strength-of-an-insurance-company

7

The premium offset year is not guaranteed and relies on the payment of nonguaranteed dividends and the amount of paid-up additions in the policy in order to pay for the policy’s required premium.

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