Breaking Down Participating Whole Life Insurance
March 8, 2024
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Permanent life insurance is an alternative to term insurance, wherein the coverage extends for all your life. Permanent life insurance has several variations, including participating whole life and universal life. Participating whole life, the subject of this article, is a form of permanent life insurance policy where payments are made for a certain number of years (sometimes 10 to 20) and the insured’s beneficiaries receive a minimum guaranteed payout upon the insured’s death.
In this article, we’ll go over who needs participating whole life insurance, what it costs, and why it might be of benefit to you over some other life insurance options.
Who needs to purchase a participating whole life insurance policy?
There are many reasons why someone might purchase a participating whole life insurance policy. Participating whole life and any permanent life insurance policy are alternatives to term life insurance policy, where the insured requires lifelong coverage versus coverage for only a set period of years. Unlike some permanent life insurance options, participating whole life insurance may be paid up after a specific period, so you won’t be needing to make payments each month until your passing.
Here are some of the many reasons why people might choose to buy a participating whole life policy:
- To provide coverage for final expenses, whatever those may be. They could be funeral arrangements, end-of-life medical costs, etc.
- To pay any remaining tax due upon death, such as capital gains on an investment or investment real estate.
- To top up a spouse’s existing investment or savings pool when the insured dies. This serves as something of a safety net, in the event that returns end up being less than anticipated or the spouse’s retirement expenses are more than anticipated.
- To provide a charitable donation for the insured’s favourite charity, to keep their values living long after they have passed.
- To create an estate or maximize a larger estate, wherein monthly insurance payments are used to guarantee a larger, immediate estate for the beneficiaries.
What are some benefits of a participating whole life insurance policy?
Upon applying for a participating whole life insurance policy, your premiums will end up being calculated based on how much coverage you want/need, and additional factors such as your age, health, current lifestyle and any high-risk factors. You may be requested to partake in a medical exam to gauge your rates even further based on your existing health and any conditions you may suffer from.
Depending on your payment method of choice, you will be required to pay premiums every month or every year. An amount of those premiums will go towards ensuring that the policy can remain active, and another portion of it ends up being invested by your current life insurance provider. The latter amount may be referred to as the policy’s cash value, which increases at a fixed interest rate and upon a “tax-deferred” basis.
With certain conditions, you are permitted to withdraw from the cash value amount during your lifetime. If you so choose, you can opt to cancel your policy altogether at a certain point and receive what is known as a cash surrender value, which is the total amount of whatever has accumulated (negating applicable surrender charges.) You can withdraw from your cash value amount whether you have non-participating or participating whole-life insurance.
You can access your whole life’s cash value in one of four ways:
- Withdrawing, which fees/taxes will apply to and will lower your benefit amount
- Borrowing, where taxes may apply and your policy’s investment account will be used as collateral
- Using it as collateral (where you decide to borrow from a bank), where taxes will not apply but upon death, the bank will receive payment before your beneficiaries
- End your policy, which may be subject to specific fees. You will receive all your cash value that has accumulated thus far but your coverage will end.
Assuming you maintain coverage for all of your lifetime, when you pass away, your named beneficiary are guaranteed to receive a death benefit. They’ll receive this payment from the life insurance company you were insured with as a tax-free, one-time payment. This payment may then be used to replace your lost income, to be used as an inheritance, to cover remaining final expenses, or anything else that your beneficiary deems fit.
What is the difference between participating whole life and universal life?
Participating whole life insurance offers very similar benefits to universal life insurance, but there are a lot of differences when it comes to their investments. Which one you end up choosing may be largely dependent upon your long-term goals and the amount of risk you wish to take on.
Universal life is different than participating whole life insurance because you can actually decide how much you choose to pay into the policy’s cash value each month. It’s more of an investment strategy for many people, and is often considered as such when people are looking for a means to deposit money they wish to be invested.
Because of this, however, universal life is considered less stable and more risky than participating whole life. Participating whole life offers multiple guarantees, such as fixed premiums, death benefit, etc., but universal life offers a multitude of investment options and flexible premiums. As such, this presents a far greater risk.
Of course, the risk that comes with universal life is largely dependent on what kind of investments are chosen.
Is participating whole life insurance better than universal life, or vice versa?
Neither is really better than the other, but both offer their own sets of benefits. It depends on your needs and coverage requirements as to how much insurance you’ll end up receiving. If you’d prefer a say in how your money ends up being invested and you desire flexible premiums, choose universal.
But if you want stability, a policy that’s easier to manage, and guaranteed premiums, then participating whole life insurance is your better option. It’s much lower risk.
Note, however, that neither policy can be converted to the other, so you’ll have to make a decision as to which you want to purchase. Ask an Excalibur Defender for advice for which policy might be best for your financial goals, current financial health, and what you want out of your life policy.