Basics of Whole Life Insurance

In another post I explained how Universal Life insurance works, in this post I’ll be going over how whole life insurance works.

Whole life is a much simpler form of permanent life insurance that has been around much longer than universal life.

Just because it’s been around for longer doesn’t necessarily mean that’s it’s a better product; there are pros and cons to both policies.

Whole life insurance has two main components;

  1. The payment period – Can choose a payment period of 8, 10, 15, 20 years or life pay
  2. The dividend type – Will explain below
    1. Paid-Up Additions (PUA)
    2. Enhanced Insurance
    3. Premium Reduction
    4. Dividends on Deposit
    5. Cash Payment

These two components are bundled together into one payment that usually can’t be changed.

The theory behind whole life is that you have a set amount of time that you pay premiums and after you no longer need to pay premiums – however, you still retain the policy.

You can think of it kind of like a mortgage on a house; once you’ve paid it off you get to live in the house without payments.

The insurance company will use the premiums that you pay them and invest them in a multitude of different investments of their choice.

When they earn a profit each year, that return will go to the policyholder in the form of a dividend.

Each dividend option has different advantages and disadvantages and won’t be discussed in its entirety in this email.

I will go over one dividend option however as it’s pertinent to understanding how back-end leveraging and front-end leveraging work.

Paid up additions works as follows:

Any dividends credited to your policy are used to purchase additional insurance, which is paid up — meaning you don’t have to pay additional premiums for this extra insurance.

This additional amount of insurance is also participating; it can also earn dividends and has a cash value.

With this compounded growth, your death benefit and cash values can increase over time.

Your policy may start at let’s say $1,000,000 face value – but over time could grow to $2,000,000 or even more depending on how long you hold it for and what the returns from the insurance company are.

The pros of whole life are that they are contractually obligated meaning that once you pay your set premiums you are guaranteed to have your insurance.

The cons are that there a lot less flexible and not as ‘transparent’ as universal life policies, they also can be more expensive.

Obviously, there’s much more to it than this, but this is a good start to give you a basic understanding.

I will encourage you to schedule a free 30-minute strategy session with me.

What this session will highlight is:

  1. If you have unforeseen liabilities threatening your future
  2. How you can be more efficient with your finances and save on taxes
  3. How you can receive maximum after-tax value from your company if/when you sell
  4. How you can pass down your business to your family without sacrificing your goals
  5. If your planning has something missing from it

So please schedule a session and I look forward to exploring how we can help you.

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