Participating Whole Life For Senior Clients? Its Worth Considering
If there were such a thing as a stealth life insurance product, it might be participating whole life (par WL).
The product line doesnt often capture the imagination of the public and there is not much discussion about it in the industry. Yet it continues to thrive under the radar screen, remaining a key element in many companies product portfolios. It also has many qualities that make it a good fit for clients preparing for their senior years.
A quick par WL review should shed some light on this and on the products staying power.
Since todays insurance market seems to be all about guarantees, perhaps we should start there. WL always has had them. Timely payment of premium is all that is required to guarantee the policy death benefit and the contractual cash value (assuming no policy loans have been taken).
Unlike some life insurance contracts with guarantees, however, par WL has the ability to provide a substantial non-guaranteed value (dividends). The combination of this value and the guaranteed death benefit has the ability to provide substantial flexibility in retirement while providing a death benefit for heirs.
One cant stress enough that only some of the contracts projected cash value is guaranteednamely, the guaranteed cash value (not that derived from policyholder dividends). This isnt any different, however, than other illustrated cash value life contracts, like universal life, which have both guaranteed values and non-guaranteed values.To help clients prepare for their senior years, or when considering par WL as a supplemental tool for retirement planning, its best to consider its performance and features in conjunction with more common retirement planning vehicles.
For instance, comparing the non-guaranteed nature of par WL cash values to retirement assets like IRAs and defined contribution accounts, the non-guaranteed nature is due to the dividend scale and not the financial markets. This may have some allure to a client with retirement accounts like the ones mentioned, feeling something akin to diversification. In other words, future value in the par WL contract partially relies on the continuing good experience of the insurer and not primarily or directly on the economic environment.
Some clients may be concerned about the projected cash values in a life insurance contract, especially compared with the sorts of return rates often projected for traditional retirement accounts. That is where it is important to point out the beneficial income tax treatment for properly utilized cash values in a life insurance contract.
For instance, policy dividends paid as cash and surrenders of paid-up additions from a par WL life contract (one that is not a modified endowment contract) are considered return of premium basis for aggregate cash amounts equal to the premium paid into the contract. With the availability of policy loans after reaching premium basis, the ability to access the value created by the life insurance contract on a tax-free basis is realized (of course, policy loan interest is applicable).
As long as the remaining policy death benefit always exceeds the created policy loan and loan interest, the death benefit will pay off the loan at the insureds death, without creating adverse tax consequences for beneficiaries. This favorable tax treatment of accessed life insurance contract value makes the cash value available inside the contract after-tax, which then can be compared only to returns on traditional retirement accounts after those are tax-adjusted as well.
Another favorable feature of par WL contract is that there are no age-driven tax penalties on dividends and other values (policy loan interest is applied to cash-value policy loans and surrender fees may still apply). Qualified retirement plans such as IRAs and 401(k)s require owners to be 59 to access funds without tax penalty.
Dividend payments provide additional flexibility. Most par WL contracts have several dividend options, like allowing dividends to buy paid-up additions, to be paid in cash, accumulate with interest, to buy one-year term insurance, to repay policy loans, to reduce required premiums and more. These dividend options can be changed upon request. (See the box for ways this can be done.)
Some companies even provide limited pay par WL contracts, guaranteed paid up after a certain number of years, instead of requiring future dividends to reduce or eliminate the policy premium. For a client fast approaching the senior years, this feature may provide substantial peace of mind to know exactly when the premium outlay for the contract will end.
Ownership of par WL and other permanent life insurance can provide other flexibility for the senior as well. It can be used as collateral should the need or desire arise to obtain a loan. It can allow more aggressive utilization of other assets in retirement, which is key for a client needing to access funds but still desiring to have wealth to pass along to heirs. The “permanent” part of this type of life insurance is central to these features.
To anyone who has been onboard with par WL for a long time, these items barely scratch the surface. These certainly are not new concepts, just like par WL is not a new product. But if you or your clients are new to par WL, perhaps it is worth reviewing what has made it stand the test of time.
Robert P. Stone is assistant vice president and associate actuary with American United Life Insurance Company, a OneAmerica Financial Partner Company, Indianapolis, Ind. His e-mail address is Rob_P_Stone@aul.com.
Reproduced from National Underwriter Edition, July 29, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.