What Are the Living Benefits of Whole Life Insurance?

Whole life insurance is a type of permanent life insurance, providing coverage for the insured’s life, as long as premiums are paid. It distinguishes itself from term life insurance by offering fixed premiums and a guaranteed death benefit that remains constant. A key feature of whole life insurance is its cash value, which accumulates over time. These “living benefits” refer to aspects of the policy policyholders can access and utilize during their lifetime, offering financial flexibility distinct from the death benefit paid to beneficiaries upon the insured’s passing.

Understanding Cash Value

Cash value in a whole life insurance policy represents a savings component that grows over the policy’s lifetime. A portion of each premium contributes to this cash value, which accumulates tax-deferred. Taxes on growth are not due as long as funds remain within the policy. The cash value is a guaranteed element, growing at a contractually specified rate, providing predictable accumulation. This cash value is distinct from the death benefit and serves as a policy asset the owner can access.

Cash value growth is attributed to compound interest, leading to significant accumulation over time. The policy’s surrender value is the amount the policyholder receives if they terminate the policy before maturity. This value is the cash value minus any surrender charges or outstanding loans.

Accessing Policy Cash Value

Policyholders can access the cash value in their whole life insurance policy in several ways. One approach is a policy loan, allowing borrowing against the cash value without affecting the policy’s in-force status. Policy loans are not considered taxable income as long as the policy remains in effect and is not surrendered or lapses. These loans accrue interest, and if not repaid, the outstanding balance plus interest will reduce the death benefit.

Another option is partial withdrawals from the cash value. Withdrawals can be tax-free up to the premiums paid into the policy, known as the cost basis. Any amount withdrawn exceeding total premiums paid is taxable income at ordinary income rates. Alternatively, a policyholder can surrender the entire policy for its cash surrender value. Surrendering the policy terminates coverage, and the policyholder receives the cash value, less any surrender charges or outstanding loans. If the surrender value exceeds total premiums paid, the excess is taxed as ordinary income.

Utilizing Accelerated Benefit Riders

Accelerated benefit riders allow policyholders to access a portion of their life insurance death benefit while still living, under specific conditions. These riders are included in policies or can be added for an additional cost. Funds from these riders can provide financial relief for medical or care costs during difficult health situations.

The Terminal Illness Rider activates if the insured is diagnosed with a terminal illness and has a life expectancy of 12 to 24 months. The Chronic Illness Rider provides benefits if the insured is unable to perform a specified number of Activities of Daily Living (ADLs), such as bathing, dressing, eating, continence, toileting, and transferring, or has severe cognitive impairment. The inability to perform at least two of these six ADLs for a certain period, such as 90 days, can trigger this benefit. The Critical Illness Rider allows access to funds upon diagnosis of specific severe diseases, including heart attack, stroke, and certain types of cancer. Payouts from these riders reduce the policy’s death benefit and may impact the cash value.

Policy Dividends and Their Use

Dividends in whole life insurance policies are payments made by mutual insurance companies to policyholders, reflecting the company’s financial performance. While not guaranteed, these dividends can be a living benefit for policyholders. Mutual companies, unlike stock companies, are owned by policyholders, and a portion of profits can be distributed as dividends.

Policyholders can utilize these dividends in several ways. They can receive the dividend as a cash payment, offering immediate liquidity. Another option is to apply dividends to reduce future premium payments, lowering out-of-pocket costs for maintaining the policy. A popular use is to purchase Paid-Up Additions (PUAs), which are small, fully paid-up whole life insurance policies. PUAs increase both the policy’s death benefit and cash value, enhancing the overall policy value and generating further dividends, creating a compounding effect. Dividends can also be left with the insurer to accumulate at interest, providing additional tax-deferred growth within the policy.