What Are Whole Life Insurance Policies Contractually Guaranteed To Provide?
Whole life insurance policies are designed to provide a guaranteed cash value and death benefit to the policyholder. By paying larger premiums for a shorter period of time, policyholders can achieve a paid-up policy status, meaning no further premiums are due, and the cash value grows towards the death benefit on a guaranteed basis. Most mutual insurance companies offer a contractual 10-pay whole life policy, a whole life paid-up at age 65 policy, and a life paid-up at age 100 policy.
| Policy Type | Description |
|---|---|
| 10-pay whole life policy | Policyholder pays larger premiums for 10 years and achieves a paid-up policy status |
| Whole life paid-up at age 65 policy | Policyholder pays larger premiums for a shortened period of time and achieves a paid-up policy status at age 65 |
| Life paid-up at age 100 policy | Policyholder pays smaller premiums for their whole life and achieves a paid-up policy status at age 100 |
While limited pay whole life policies offer accelerated growth, they lack flexibility and require a rigid premium structure. However, some insurance companies allow policyholders to customize the shortened payment period, making it appealing to clients with steady cash flow or dedicated assets. Paid-up additions (PUAs) are another option that allows policyholders to add additional paid-up life insurance to their existing policy. PUAs do not require underwriting or ongoing premiums and are an efficient way to accelerate growth. By raising the death benefit, more cash value must converge upon it, and policyholders can jam additional premiums into their whole life policy efficiently.
A workaround for maximum overfunding while staying compliant with insurance companies and the IRS is blending a term insurance rider into the policy. This allows policyholders to maintain proper death benefit ratios while stuffing their policy with an abundance of PUA premiums. Those with an existing policy can do a 1035 exchange, allowing for a tax-neutral swap of an existing life insurance policy into a new one. Policyholders can also roll their existing cash value into a new policy, making it lean and efficient.
Whole life insurance policies contractually guarantee a cash value and death benefit to policyholders. Limited pay whole life policies and PUAs offer accelerated growth, while blending a term insurance rider maintains death benefit ratios. Policyholders with existing policies can do a 1035 exchange, and roll their existing cash value into a new, efficient policy.
