PARTICIPATING WHOLE LIFE: Why Now?

In today’s world of financial uncertainty, participating whole life, and the guarantees it offers, may be an attractive option for consumers. Based on recent sales trends, clients are again considering participating whole life policies as a way to build cash value and offer a death benefit while they are focusing on raising a family.

Although the primary use of life insurance is to provide a needed death benefit at the time of the insured’s death, it is important to remember that the product can also be structured in order to supplement retirement income through loans and withdrawals of the policy’s cash value. Whole life offers fixed premiums that will not increase, a guaranteed death benefit payout and cash value that is guaranteed to grow each year, tax-deferred. A client’s financial planning process should consider the use of whole life because of these features.

More clients may be asking about whole life as a product option for meeting their financial needs. But some producers may have found themselves stuck in the “single solution” rut. That solution was usually low cost no-lapse universal life insurance (UL). Often, producers would adjust the length of coverage to the life expectancy based on client input rather than looking at other benefits that could be offered by life insurance in addition to the death benefit. The problem is that no-lapse universal life, while very flexible in the wealth transfer planning stage, has little or no cash value available for meeting other financial needs if issues arise.

The turbulent economic environment has highlighted that alternate options for meeting premium payments as part of a client’s overall financial plan may be important. Many clients are looking for ways to reduce out-of-pocket annual premium payments and may take loans to cover income shortfalls. Typically, they may like to skip a premium payment or two, or to change to a more frequent premium payment mode (e.g., annually to quarterly). No-lapse UL, however, was built specifically to only offer an attractive low cost guaranteed death benefit (if certain requirements are met). It was never meant to be able to generate sufficient cash value to pay premiums or provide loans. These actions would undermine a client’s financial plan objective of providing a death benefit.

So, what may explain recent interest in participating whole life? These policies offer nonguaranteed dividends and may be more cost efficient in the long run than no-lapse UL because the guaranteed cash value may eventually be greater than the premium paid. 

Also, nonguaranteed dividends offer policy owners an upside potential for growth of both the policy death benefit and cash value. Dividends are considered a return of premium so they are, generally, not taxable for federal income tax purposes until the dividends plus any

other amounts received tax free from the policy exceed the aggregate premiums that the client has paid into the policy. Although, as noted, dividends are not guaranteed, they are paid at the end of the policy year and may be used to purchase paid-up insurance, sometimes referred to as additional insurance.

Participating whole life policies also offer the producer a number of different approaches to selling their value to clients. The first way is to encourage the policy owner to consider paying premiums every year. In this situation, death benefit and cash value growth will be the strongest. For those people looking to pay premiums to retirement, say, age 65, there are two approaches.

Producers can use a “premium offset” method, which is a nonguaranteed premium paying option. This is accomplished by using paid-up additions as the beginning dividend option. At a point to be determined in the future, the dividend option could be changed so that dividends are used to reduce premiums. If a dividend is insufficient to pay the full premium, the policy owner can use the cash value from paid-up additions to pay the balance due. At the point when the dividends are greater than the premium, any excess could be used to purchase paid-up additions once again. Naturally, in this case, the policy’s death benefit and cash value will be reduced, but this option offers a way to pay ongoing premiums other than out-of-pocket. Finally, participating whole life products also offer guaranteed paid-up designs.

Some companies offer very flexible options that allow the client to select from a number of years or ages when the policy will be completely paid for or put on a reduced paid-up basis (the policy’s face amount is reduced in this latter situation). This design is the most expensive option, but once premiums are completely paid on the policy, the death benefit (of whatever amount) will never be further reduced.

There are a number of riders available for these policies, but one to consider, as noted, is the paid-up additions rider. This rider is basically a single premium whole life policy attached to the base policy. It generates early cash value and will potentially increase the policy’s death benefit. Using this rider can enhance the total cash value that may be available for supplemental retirement income purposes. The cash value build up is tax deferred as long as the policy and rider stay in force and no distributions are made from the rider (or policy). The death benefit payable from paid-up additions should be tax free for federal income tax purposes (similar to the base policy death benefit).

The paid-up additions rider can also be used to accept large, up front payments to pay future policy premiums and reduce the number of years that the premium must be paid to as few as one. Although this feature is a non-guaranteed method (e.g., a one year premium offset), it is very popular for people looking to boost their estate’s value to their heirs through policy death benefits.

Participating whole life values can be used in a number of financial plan designs. If your client is looking for supplemental retirement income, premium payments are made using after-tax dollars. When properly structured and funded, loans and withdrawals can be accessed from the policy on a tax-free basis. In a properly designed policy, there are generous limits on the amount of cash that can go into the policy and no restrictions as to the timing of when to take the cash out as supplemental income. Remember, the policy would need to stay in force until the insured’s death so that the distribution made at that time would not be subject to federal income tax; otherwise, if distributions are made prior to death (other than loans) any gain in the policy may be subject to taxation.

Some other sales opportunities to consider for participating whole life policies include

providing funds for education needs, buy-sell agreements, deferred compensation plans, and other employee benefit plans. Although initially it may appear to be more costly than other solutions, participating whole life may ultimately offer the flexibility you are looking for to meet your clients’ financial needs. Next time the right situation presents itself, look closely at whole life’s death benefit guarantees and potential ability to provide cash when needed.

Please note: This document is designed to provide introductory information on the subject matter. Descriptions of policy features and options are only partial; for complete details and limitations ask to see a specimen policy.

by Robert A. Passero for Producer eSource

Robert Passero CLU, ChFC provides point-of-sale and case consultation in a variety of advanced markets areas. His extensive knowledge of products and sophisticated product illustration techniques make him a valuable resource for insurance reviews, complex product issues and illustration design for Metlife’s Wealth Advisory Group.

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