Whole life insurance benefits include permanent insurance coverage along with a lifetime of financial and tax advantages2. From the first day your policy is in effect, it will help protect your family from the financial consequences of unexpected death. Down the road, it can be used as an asset to help get you through a period of financial stress3. Later still, it can be used to help make your retirement more comfortable or help pass assets on to the next generation. No matter which company you get your whole life policy from, it will provide three specific guarantees:
- A guaranteed death benefit - The amount of money paid to your beneficiaries, income tax free, when you die is guaranteed to never decrease.
- A guaranteed level premium - As long as you keep paying premiums, the policy will stay in effect and your payments are guaranteed to never go up.
- A guaranteed cash value - The policy’s cash value component is contractually guaranteed to grow at a set rate each year. However, that rate can vary from one insurance company to the next.
How cash value grows
All whole life policies have a cash value component that is guaranteed to grow tax-deferred at a certain rate that varies by company. Certain insurers also provide options that allow growth to be calculated in different ways with the potential (but not certainty) of more upside. For example, Guardian offers eight different growth options4 including one choice that lets policyholders link a portion of their cash value to the S&P 500 Index5,6 to allow for greater growth – while still guaranteeing increases of at least 4% per year.
Some providers let policyholders earn dividends
Every whole life insurance policy has a cash value component, but they may not all pay dividends7. Mutual life insurance companies are owned by their policyholders, so the cash value portion of their policies can typically earn annual dividends – a portion of the insurer’s profits. Dividends can help increase cash value beyond the guaranteed growth rate. While annual dividends are not guaranteed, Guardian has paid them every year since 1868
Dividends can be used in different ways, but one of the most common options is to purchase paid-up additions (PUAs)8: guaranteed permanent, paid-up life insurance. This can provide you with a growing asset and guaranteed death benefit. Over time, the compounding accumulation of PUAs can help to offset the effects of inflation.
Another one of the many whole life tax benefits includes the ability to withdraw dividend accumulations tax-advantaged, up to the policy basis (i.e., the sum of premiums paid to date). Other dividend options include:
- Receive in cash
- Reduce premium
- Purchase additional term insurance
- Accumulate with interest
- Apply to outstanding policy loans
Cash value can be used throughout your life
Whichever method is used to build cash value, over time it can grow into a useful sum9. All insurers let you use it in various ways: You can borrow against in a tax-advantaged way, or use it for premiums, resulting in savings each year in payments. There is also actual cash value that can be surrendered for a large sum of money to help fund your retirement. Some providers will even let you use it to boost the death benefit, helping you to transfer assets to your heirs with fewer tax consequences.
Using the death benefit in different ways to achieve different goals
The insurance policy beneficiaries are usually family members, but they don’t have to be. If you own a business with partners, this insurance can be used to fund a buy-sell agreement: the partners are the named beneficiaries, and if you pass away the payout can be used to purchase your share of the company from your estate. Your beneficiary doesn’t even have to be a person: you can leave all or part of the benefit to an entity, such as a charitable cause.
Even if the benefit goes entirely to your family, you can also reallocate it to serve different purposes as circumstances change. For example, while your children are still at home you may choose to leave the entire amount to your spouse. Later in life as you’re planning your estate, you may decide to use the benefit as part of your estate tax strategy by allocating a portion of your death benefit directly to your children – or grandchildren.
Do they have a strong financial history?
When you’re buying a financial product with a payout that may be decades away, a long track record of financial strength10 is important. So consider looking at two things in an insurance company:
- How long the company has been in operation
- Their Financial Strength Ratings
Some life insurance providers have been around for decades, which may seem like a long time; Other life insurance companies have existed for generations (Guardian was founded 160 years ago, in 1860). Such organizations have developed the institutional knowledge and experience to invest and manage assets for the long term, meeting obligations to their policyholders through economic downturns, global wars, and pandemics.
While that kind of history can and should provide reassurance, it’s important to remember that past performance does not guarantee future success. So you should also look at a company’s Financial Strength Ratings. These are current, objective measures of financial strength, provided by reliable independent sources such as A.M. Best, Fitch Ratings, Moody’s, and Standard and Poor’s. For an example of the kinds of ratings to look for, here are Guardian’s Financia Strength Ratings:
Ratings are as of October 1, 2020 and are subject to change.
Are they a mutual company or a stock company?
Some insurance providers are public entities owned by shareholders. A mutual company – like Guardian – is owned by its policyholders. Some insurance companies also provide another, more tangible benefit: policyholders can be paid dividends, which helps build value. While annual dividends are not guaranteed, Guardian has paid them every year since 1868.
Do they offer different cash value growth options?
If you want more potential for growth you should consider a provider that offers cash value growth options. For example, Guardian’s Index Participation Feature allows policyholders to allocate all or a portion of their cash value of paid-up additions to receive a dividend adjustment based on the movement of the S&P 500® Price Return Index, subject to a cap and a floor.
Do they have whole life options that work for your goals?
Whole life insurance can help fulfill a number of needs. If you’re older and looking for a policy as part of an estate strategy, you should consider looking for a company that issues policies for people your age. (The Balance recently named Guardian Life Best for Estate Planning in part because issue ages go up to 90.) Concerned about long term growth of your asset? Look for a company that offers growth options. Want greater protection in the event of a disability? Consider looking for a Disability Income Rider that can provide a monthly benefit if you have a qualifying disability, along with a robust Waiver of Premium Rider11 to help fund your policy while you’re unable to earn income. Riders (i.e., optional policy provisions) can be an important tool for tailoring a policy to your needs, so consider an insurance company that offers a range of options.
Do they underwrite their own policies?
Some insurers issue their own policies, while others offer policies of many different companies. A whole life policy is an instrument that can help you reach your financial goals over the years – and you should consider how easy it is to communicate with the insurance companies you are considering.
Do they offer a full range of life insurance products?
Why should a company offer other kinds of life insurance? Because at some point in the purchase process, you may actually decide that a different type of policy may better meet your needs. For example, if you’d like more payment flexibility, a universal life insurance policy could be an option to consider: it offers permanent coverage and cash value, but the premiums are flexible: you can raise or lower your payments within certain limits12. Or you may decide to start by getting a term policy with a conversion rider that allows you to convert to a whole life policy later on without having to get a new medical exam.
You don’t just buy a whole life policy – you apply for it. There is an underwriting (risk assessment) procedure for every contract before it goes into effect, and insurers have slightly different standards, especially when it comes to issuing policies for smokers and people with underlying medical conditions (for example, Guardian offers coverage for people living with HIV). In any case, you will likely need to undergo a medical exam to verify your health status. Features, provisions, and costs also vary from one insurer to the next, your specific policy premiums can vary widely based on your coverage amount, age, health, lifestyle, gender and other factors such as optional riders.
The net result is that each whole life contract is a unique financial instrument tailored to the specific needs of the policyholder. You should consider speaking with an experienced financial professional who will listen to your needs and dig deep to learn more about your situation. They can help you evaluate how much coverage is right for you, then guide you through the various policies, riders and provisions that best fit your needs. How do you find such an professional? Ask a friend or colleague for a recommendation. Or, we can put you in touch with a Guardian representative who can provide you with a quote.
How do I know if whole life insurance is right or wrong for my needs?
The answer depends of your specific situation and personal preferences. It can be an especially powerful financial asset for people with young families who want permanent life insurance protection with a tax-advantaged, guaranteed cash value component. Others use whole life primarily for their estate planning strategy. If your income is more variable, universal life could be an option to consider, because premiums are flexible within certain limits. If your budget is limited and you just want coverage for a limited number of years, term life could be an option to consider.
What is whole life insurance?
Whole life insurance is the simplest form of permanent life insurance coverage with the most guarantees. The premium remains the same for life and the death benefit is guaranteed – as long as you continue to pay premiums, the policy will stay in effect and a death benefit will be paid to your beneficiaries. There is also cash value that grows at a guaranteed rate and growth is tax-deferred. It can be borrowed against in a tax-advantaged way, used to pay premiums, or even surrendered for cash to help fund your retirement.
Which is better, whole life or term life?
The answer to this question depends on your situation. There are a lot of different ways to compare term vs. whole life insurance companies and policies. Both pay a death benefit to your family if you pass away but there are significant differences:
- Whole life provides permanent, life-long coverage; term coverage is temporary and typically limited to 10, 15, 20 or 30 years at most.
- Whole life provides a cash value component that is guaranteed to grow at given rate each year; term life is a “pure” insurance product with no cash value component.
- The added cash value of a whole life policy – along with the guarantee that the insurer will eventually pay a death benefit – means that the cost is typically higher compared to a term policy.
Do all life insurance companies offer whole life insurance policies?
No. Some providers only offer term life insurance, which is a much simpler product with fewer guarantees and features. Other companies don’t issue their own whole life insurance policies; instead they offer policies from a variety of companies.