Whole life insurance policies involve many parts, including a guaranteed cash value and a dividend value that bring profits to a policyholder’s investment. The amounts vary depending on what is paid into the policy, and each part has its own benefits to consider.
On this page, we look at the different parts of a whole life insurance policy before diving deeper into the guaranteed cash value and dividend value and the different ways you can use each.
Whole life insurance policy premiums are more expensive than other options, like term policies, but they are permanent and can include three main parts:
The death benefit is standard for life insurance policies. This is the amount that is paid to a beneficiary after the policy is claimed. For whole life insurance policies, the death benefit is paid out as long as the premiums are all paid up.
The guaranteed cash value is the portion of the policy that is guaranteed to be accessible during the life of the policyholder.
A dividend value is a major part of many, but not all, whole life insurance policies. These are involved when the policyholder opts to participate in the earnings of the insurance company, and these policies are usually referred to as participating policies.
The guaranteed cash value of a whole life policy is the amount that a policyholder can benefit from while still alive. The cash value is separate from the death benefit for the most part, and policyholders can use it as needed (within bounds).
Not every cash value is guaranteed, so you need to take the time to read through a policy to make sure the cash value is guaranteed. Without this in explicit writing, you can end up with a policy that falls short of your expectations.
The cash value of a whole life insurance policy is easy to access in most cases, and it gives you plenty of opportunities to borrow funds with little to no interest or fees.
There are many ways to access the guaranteed cash value of your whole life policy.
The method that most prefer, and the one that is most recommended, is a policy loan. You use the policy as collateral, and you can pay back the loan in your own time. If the loan is still due when the policy is claimed then the amount is paid from the death benefit.
You can also surrender the policy in certain circumstances to claim the cash value of a whole life policy, but surrendering tends to incur a fee, and you lose your death benefit.
The dividend value of a whole life policy is more difficult to understand, and not every whole life policy includes a dividend value.
Those that do are typically referred to as “participating” life insurance policies because the policyholders are participating by investing time and money into the insurance company. In return, the insurance company pays out dividends to policyholders and gives them more opportunities to influence the decisions of the business.
Canada has an impressive record when comparing dividend payments from insurance companies to guaranteed investment methods like GICs or government bonds.
Pursuing a dividend value is risky because there is no guarantee that dividends will payout every year. While most years go as planned, when a company is paying out more death benefits than usual there is a chance to forego dividend payments that year.
Policyholders have many benefits attached to participating in a dividend policy. The most obvious is the annual payouts of dividends. There are many ways to receive these dividends, and policyholders can do what works best for them.
Policyholders have more influence on how the business is run. They can elect the board of directors, giving an indirect influence on company decisions. In many cases, policyholders are also allowed to vote on the issues that the company faces to provide their thoughts.
Policyholders have access to more transparency between the company and its customers. There is a better chance for communication, leading to a more stable business that can grow long-term.
To access the funds from whole life policy dividends you have plenty of options.
You can use the dividends to purchase additional coverage. This lets you build your cash value, and it compounds your earnings. When you use dividends this way your money can grow on a tax-deferred basis.
Dividends can also be used to offset or reduce premiums by paying them in full or part. Participating policies can reach a point where the combined value of dividends and the cash available can pay all future premiums. This premium offset point turns the policy into a self-sufficient asset.
When the cash value of the policy grows larger, it can be used to purchase additional term life policies to increase coverage or cover aspects that have a time limit, like mortgages. You can also purchase paid-up additions to increase the value of whole life and death benefit overall, and there are no taxes due until the death benefit is paid out.
You can leave dividends on deposit to collect interest. When doing this the future dividends are taxed once they exceed the adjusted cost base of the policy. Any interest earned is reported to the policyholder annually.
Some policyholders just use dividends as another avenue for income and opt to have them paid out in cash. There is taxation at this point, but you can then use the funds for purchases outside of life insurance.
The guaranteed cash value and the dividend value of a whole life insurance policy provide opportunities for growing wealth. Contact Sim Gakhar to learn what your options are in these areas and for personalized recommendations that work best for your situation.
When it comes to life insurance there really is no time that is too soon to get covered. And, this is because the younger you are, the cheaper those premiums are going to be. Not only this, but you are probably healthy right now.
If you wait until something bad happens, you will not only without a doubt face higher premiums, but you might not even be able to get covered at all.
Copyright © 2022 | Sim Gakhar