The basic features of a whole life policy

A whole life policy is a unique financial instrument designed to provide a lifetime of financial benefits, along with tax advantages not found in other types of assets. 3

From the first day your policy is in effect, it will give you the confidence of knowing your family is protected from the potential financial consequences of unexpected death. A few years down the road, it can be used as an asset to get you through a period of financial stress 4. And decades later, it can be used to enhance your retirement and even help minimize taxes on assets passed to the next generation.

Your policy is a personalized contract between you and an insurance company that defines the following guaranteed values:

  • A guaranteed death benefitThe amount of money the insurance company will pay to your beneficiaries, income tax-free, when you die. It is guaranteed to never decrease. 
  • A guaranteed cash value: The policy’s cash value component is contractually guaranteed to grow at a set rate each year. For Guardian, that rate is 4 percent for the entire life of the policy.
  • A guaranteed level premium: Your monthly or yearly payments are contractually guaranteed to never change. As long as you keep paying premiums, the policy will stay in effect.
  • A guaranteed endowment: The death benefit is contractually guaranteed to be paid if you are still living at the age specified in the contract, typically 100 or 121

Who can be a beneficiary?

In most cases, beneficiaries are family members, but they don’t have to be. If you own a business with partners, a whole life policy can be used to fund a buy-sell agreement: the partners are the named beneficiaries, and if you pass away the payout is used to purchase your share of the company from your estate. 

You can also opt to designate different beneficiaries or reallocate the death benefit 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 want to help reduce estate taxes by allocating a portion of your death benefit directly to your children – or grandchildren. For that matter, your beneficiary doesn’t have to be a person: you can leave all or part of the benefit to an entity, such as a charitable cause. Such distribution options give whole life a degree of usefulness and flexibility that may not be found in other assets.

How is cash value determined?

A whole life insurance policy has a cash value that is guaranteed to grow – tax-deferred – while providing benefits you can use while you’re still alive. However, different policies and providers have different ways of calculating that growth: Guardian whole life insurance policies offers many different options. For example, some of your cash value can be linked to the S&P 500 Index. 5 Whichever method is used to build cash value, it can grow into a useful sum that can be borrowed against in a tax-advantaged way, used to pay premiums, or even surrendered for cash to help fund your retirement.

A policy’s cash value can also earn dividends

While all whole life insurance policies have cash value, not every policy pays dividends.

Mutual companies are owned by their policyholders, so the cash value portion of their policies can earn annual dividends – a portion of the insurer’s profits.6 These can increase your cash value beyond the guaranteed growth rate. While annual dividends are not guaranteed, Guardian has paid them every year since 1868.

Depending on your needs, you can opt to use dividends in different ways. One of the most widely selected options is to purchase paid-up additions (PUAs): guaranteed permanent, paid-up life insurance.This can provide you with a growing cash value and guaranteed death benefit. Over time, the compounding accumulation of PUAs can help to offset the effects of inflation. Dividend accumulations can also be withdrawn tax-favored, 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

How to tailor a policy to your needs

The size of your policy’s death benefit can play a key role in determining how well it suits your needs. That, in turn, will depend on your reasons for getting the policy. If you’re primarily looking to build a long-term asset or use your policy as an estate or business continuity planning tool, that amount will be determined by the specifics of your situation. Start by speaking with your accountant and/or financial professional to determine what might be a useful amount and how your policy should be structured. 

On the other hand, if you’re looking to get a policy for family protection and a long term strategy, there are a few general rules for determining your coverage needs. You may want enough to replace the income you would have provided, and cover extra costs your family will face in your absence – especially while your children are growing up:

  • Consider 10x your salary: This is one of the simplest rules to follow, and it can provide a useful cushion for your family – but it may not take all your actual needs into account.
  • Consider 10x your salary, plus college expenses: If you add $100,000 - $150,000 for each child, that can help ensure they have the education you want for them. 
  • Consider the DIME formula: DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house).
  • Consider Human Life Value*
    Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future. In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits. As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:
Age Insurance Amount
18-40 30 times income
41-50 20 times income
51-60 15 times income
61-65 10 times income
66-70 1 times net worth
71-75 1/2 times net worth

Any of those methods are a good start, but it’s recommended that you talk with an insurance professional who can better help calculate your coverage amount and shape a policy to more fully meet your needs. 

Consider getting one policy for two spouses

Many whole life policies cover one individual, but Guardian offers a “survivorship policy” that insures two people, typically a married couple, on a single policy. With this type of policy, the cash value increases after the first person dies, and the death benefit is paid to the beneficiaries after the second person dies. 

Decide which riders may be worth adding to your policy

Every insurer offers a number of riders (optional provisions) that can add flexibility and extra value while letting you tailor your coverage to your needs.Some of the more popular options offered by Guardian include:

  • Waiver of Premium Rider:9 This provides disability protection by funding your policy if you suffer a qualifying disability. 
  • Paid-Up Additions Rider: The PUA rider can help increase the accumulation of tax-deferred cash values and death benefit. The higher the premium paid into the rider, the greater the protection afforded by the policy.
  • Accidental Death Benefit: Provides an additional death benefit in the event that death occurs by accidental bodily injury. 
  • Accelerated Benefit Rider: 10 Allows you to accelerate the benefits of a whole life policy for chronic and terminal illnesses. There is no additional premium charged for adding this rider.
  • Guaranteed Insurability Option (GIO): Gives the policy owner the right to purchase additional insurance without evidence of insurability. The GIO becomes even more valuable in the event of disability: An insured who is disabled and has their premium waived may exercise the GIO rider, and Guardian will pay the premium on the new policy.

What a whole policy can cost – and why the company you buy from matters

For a given amount of coverage, whole life insurance policies generally cost at least five times more than term policies.11  It’s a good idea to ask yourself if whole life is the best coverage for your needs.

Compared to a term policy, whole life can provides lifelong protection: The premiums will never go up; the death benefit will never go down; the cash value will always grow at a guaranteed rate; also, you or your beneficiaries are assured of an eventual payout, so you may feel you’re getting more value for your premiums. On the other hand, if you just need a death benefit to protect your family’s finances for a limited time, for example, while children are still at home, a term life policy can be a less complex, lower-cost choice. But once your policy’s term is over, it will have no value. If you want continued life insurance protection, you’ll have to apply for a new policy with potentially higher premiums – because you’ll be considerably older.

Compared to other forms of life-long coverage, such as a universal life policy, whole life can be simpler and offer additional guarantees – but offers less flexibility.11 Like whole life, a universal policy provides cash value, but the premiums are variable: you can raise or lower your payments as you see fit, within the policy limits.12 This can provide added flexibility to people with variable incomes, although paying in less could eventually result in the need to pay more later on to keep your coverage. Having another child, moving on to a different job, or taking out a loan to buy a business — all might be instances where this combination of stability and flexibility becomes important. 

How much will you pay for your whole life policy?

You might have seen advertisements or articles making a claim such as, “…a healthy 30-year old male can get $250,000 of whole life coverage for $2,000 a year.” That may be true – but may be irrelevant to you because each whole life contract is unique to the policyholder.

Premiums can and do vary widely based on your coverage amount, age, health, lifestyle, gender, and other factors. Features, provisions, and costs also vary from one insurer to the next. But after a short initial meeting with a knowledgeable broker or financial representative, they should be able to give you an idea of what you’ll pay. You’ll also have to decide how you want to pay.

Generally speaking, there are two basic types of payment structures:

  • Level premium whole life: The most popular choice. Guardian’s level premium policies go to ages 95, 99, and 121, making it easier to provide affordable lifetime coverage with the knowledge that your premium won’t change.
  • Limited payment whole life: This also has a level premium – but it’s only paid for a fixed period of time. The advantage is that the policy is then guaranteed to be paid up, so no payment is required at later ages.

Which insurance companies should you get quotes from?

All large, nationally known insurers may seem alike, but they aren’t. Policies and contract terms vary in ways that can make a significant difference. As we’ve noted, Guardian offers cash value growth options that other insurers may not offer and has unique products like a survivorship policy that can cover two spouses. Underwriting methods may also be distinct. For example, Guardian will offer policies to healthy people living with HIV, but other companies may not. In addition to these more subjective criteria, there are objective measures that can help you decide which insurers you want to work with

  • High Financial Strength Ratings: Independent companies rate the financial strength of insurance companies to ensure their ability to meet obligations. Look for strong ratings from the various rating services for the insurance industry.
  • High customer satisfaction scores: There are customer surveys and reviews that can tell you how satisfied others are with a company’s services. 
  • Low customer complaints: State regulators and private organizations collect and publish data on customer complaints.
  • Product selection and customization: Some companies focus on term insurance, while others offer term and whole with a variety of optional riders that tailor a policy to your needs.
  • Policyholder dividends: Some insurers – typically mutual companies – pay a dividend on the cash value of their permanent policies. Others may not.
  • Direct underwriting: Some companies issue their own policies, while others act as a middleman.

After you’ve identified your shortlist of insurers, speak with an experienced agent or broker who will listen to your needs, and dig deep to learn more about your situation. Then they can evaluate how much coverage is right and then guide you through the various policies, riders, and provisions that best fit your needs. How do you find an experienced professional? Ask a friend or colleague for a recommendation. Or, we can put you in touch with a Guardian representative.

Frequently asked questions about getting whole life insurance

Is a whole life insurance policy worth it?

That depends on your financial situation and the level of protection and guarantees needed to make you feel comfortable. If you want permanent life-long insurance coverage with clear guarantees for cash value growth and cost stability, whole life insurance is an option to consider.

Which is better, whole life or term life insurance?

Compared to whole life, a term policy will typically give you a larger death benefit for each dollar paid in premiums. On the other hand, a whole life policy offers benefits a term policy can’t: it provides coverage that lasts your entire life, plus cash value that is guaranteed to grow over time.

What are the disadvantages of whole life insurance?

Compared to a term policy, a whole life policy is typically more expensive for a given level of coverage. A whole life policy is also more complex, in part because it’s designed to protect you for the rest of your life. 

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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 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

3 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.

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 The Index Participation Feature (IPF) is a rider available with select Guardian participating whole life policies. With the new IPF, policyholders can now allocate between 0% and 100% of the cash value of paid-up additions (PUA) to the IPF each year. The IPF provides an adjustment to the dividend paid under the policy. This adjustment, subject to the cap rate (currently 11%) and floor (currently 4%), may be positive or negative based on the S&P 500 price return index performance. Adverse market performance can create negative dividend adjustments which may cause lower overall cash values than would otherwise have accrued had the IPF rider not been selected. While the adjustment provided by this rider is affected by the S&P 500 price return index, it does not participate in any stock or equity investment of the S&P 500 price return index.
The S&P 500 price return index is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by The Guardian Life Insurance Company of America (Guardian). Standard & Poor’s® and S&P® are registered trademarks of

Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Guardian. The Index Participation Feature (“Product”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such Product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 price return index. The cost of the IPF rider is currently 2% with a guaranteed rate of 3% on the IPF portion of the policy. Policy loans against, or withdrawals of, values allocated to the IPF could negatively impact rider performance.

Selection of the IPF may restrict the use of certain dividend options.

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

7 Paid-up Additions (PUA) are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy. Adding large amounts of paid-up additions may create a Modified Endowment Contract (MEC). A MEC is a type of life insurance contract that is subject to last-in-first-out (LIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution may also be subject to a 10% federal tax penalty on the gain portion of the policy if the owner is under age 59 ½. The death benefit is generally income tax free.

8 Riders may incur an additional cost or premium. Riders may not be available in all states.

9 A Waiver of Premium rider waives the obligation for the policyholder to pay further premiums should he or she become totally disabled continuously for at least six months. This rider will incur an additional cost. See policy contract for additional details and requirements.

10 The cash surrender value, loan value and death proceeds payable will be reduced by any lien outstanding due to the repayment of an accelerated benefit under this rider. The accelerated benefits in the first year reflect deduction of a one-time $250 administrative fee, indexed at an inflation rate of 3% per year to the rate of acceleration. Please see state-specific EABR Disclosure form (01-ABR-1) for complete details about the rider.

11 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

12 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

13 Financial information concerning Guardian as of December 31, 2019, on a statutory basis: Admitted Assets = $62.2 Billion; Liabilities = $54.6 Billion (including $46.5 Billion of Reserves); and Surplus = $7.6 Billion.

 

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