What is whole life insurance?
Unlike term insurance, which only pays a death benefit if the insured dies within a specified time frame, whole life insurance is designed to pay a death benefit no matter how long the insured lives. Although premiums are higher than for a comparable death benefit, many workers prefer to have a portion of their life insurance in a whole life plan, because eventual payout is a certainty, if the policy is kept in force. This is contrasted with term life insurance policies – only a very small percentage of which, thankfully, ever pay a death benefit.
Whole life insurance is characterized by a permanent tax-free death benefit, and a gradual but guaranteed build-up in cash value. The cash value increases over time according to a guaranteed crediting rate, usually competitive with a CD, except that the crediting interest rate is tax free. Additionally, some policies from mutual carriers pay a dividend, which represents the policy owner's share of the company profits. These dividends also accumulate tax-free, but they are not guaranteed.
The primary purpose of whole life insurance is to provide a permanent tax free death benefit. Workplace whole life goes with the employee. Workers don't lose coverage when they leave your employment, so this coverage can continue into their retirement, long after term insurance expires or becomes unaffordable.
Workers can also tap the cash value in their workplace whole life plans for anything they like. Many policy owners use it to pay college expenses for children, to help buy cars, or to help supplement their retirement incomes. Some use it their whole life cash values as the “safe money” part of their long-term savings program, because of the safety and guarantees in the life insurance contract. They can generally tap this cash value tax-free, in the form of policy loans. They can pay back the loan, with interest, or let interest accumulate, to be paid back ultimately out of the insurance policy's death benefit.
There is no requirement for workers to be age 59 ½ or older to access the cash value in their whole life policy, which makes this plan a compelling alternative to other savings options, such as fixed annuities or guaranteed investment contracts (GICs) within a 401(k) plan, which charge 10 percent for early withdrawals, and are taxable as income.
Whole life insurance is a particularly powerful tool for managers and executives, as well. They are generally more able to afford whole life premiums, and can contribute additional premium to help build up cash value faster, and maximize the benefits of the whole life insurance contract.
Many businesses use whole life insurance to fund “key person” policies on executives. When the company owns the policy, they can use the cash value to fund a bonus to the employee to stay a certain number of years, or even use the policy cash value as operating income.
Whole life insurance can also be valuable in funding buy-sell agreements among business partners.
There are a number of ways to structure whole life insurance on owners, managers and executives as part of a non-qualified compensation program, to supplement your company's 401(k) plan and to help you retain top quality management talent.
Each company is different, and whole life insurance is a remarkably versatile and flexible instrument, but also provides a lot of security, safety and guarantees. Speak with your agent about how best to make whole life insurance work in your workplace.