The recent developments in investment markets and the poor performance that has resulted have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.
Whole Life is a permanent insurance contract with level lifetime guaranteed premiums and tax advantaged cash value growth. If the contract also pays the policyholder annual dividends the Whole Life contract is referred to as participating. These dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax advantaged growth is “paid-up additions”. Paid up additions are blocks of single premium life insurance which also pay an annual dividend so these blocks contribute to the building of both significant cash value and estate value (death benefit). In a participating policy all policy owner premiums are pooled under a “participating account”. From this pool certain expenses and taxes are deducted along with death benefits paid to beneficiaries. In addition to the annual premiums of policyholders, investment gains and other income (such as policy loan interest) are credited to the participating pool. The assets of the participating pool are professionally managed and largely in fixed income investments. Management fees are extremely low (one company charges 0.072% management fee) and the funds have very little volatility. This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred and, if paid to the beneficiary as a consequence of death, tax-free.