Whole Life Policies: Tapping Cash Value as Alternative to Equity Investing

julio 26, 2012 · Imprimir este artículo

Whole Life Policies: Tapping Cash Value as Alternative to Equity Investing

By William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.


Whole life insurance policies have taken the spotlight as investors seek secure investment alternatives to today’s rocky equity markets. Not only do these policies provide for tax-deferred growth, but they come with many of the guarantees sought by clients today.

The market for these policies is soaring, as clients see them as vehicles allowing for a return on their investment in the life insurance contract without the risks inherent to investing in the open markets. An advisor’s guidance can be critical in determining whether a whole life policy is a smart investment for any given client and can also provide invaluable in navigating the often-complex rules governing the tax treatment of these policies.

The resurgence of whole life insurance

The stock market losses sustained by your clients in the past few years have them scrambling for alternative investment avenues. They simply are not willing to continue to risk their savings in what is often perceived as a volatile (and hostile) investing environment. A whole life insurance policy may provide a safe long-term investment because the investment in the contract grows tax-deferred and often at a guaranteed rate regardless of how the stock markets are performing.

At its most basic level, a whole life insurance policy requires that an investor pay a level premium each year and provides for a guaranteed death benefit on the death of the insured. However, these policies also contain an investment component. A portion of the premiums paid is invested by the company issuing the policy, building cash value in the policy that the insured can borrow against.

Further, many of these policies pay an annual dividend, which is sometimes set at a guaranteed rate over the life of the policy and can be as high as 6% per year. These guaranteed dividends make whole life policies attractive for many investors looking for an income stream from their investments.

It is important to note that a whole life policy is a long-term investment — it may be necessary to pay premiums over a period of 15 to 20 years in order to realize a decent return on the investment.

Accessing the cash value of the policy: Tax implications

The advice of a financial advisor is critical in determining if and when withdrawing against the cash value of the policy is a smart choice. In general, the policyholder can borrow against the accumulated cash value without paying taxes or interest on the amount withdrawn. Of course, there are exceptions and consequences that must be considered when making these withdrawals.

Any withdrawals that are not repaid before the insured’s death will reduce the death benefit payable on the policy, so if the policy is purchased primarily to provide for the policyholder’s beneficiaries, withdrawals may not always be appropriate.

Despite the general rule, withdrawals are sometimes taxable. For example, if the withdrawal is made during the first 15 years of the policy’s existence and reduces the death benefit payable, the amount may have to be included in gross income. Any withdrawal that exceeds the taxpayer’s basis in the policy will be subject to income taxation.

In some cases, if the withdrawal is for more than the policy’s cash surrender value, the insurer can increase the premiums required to maintain the same death benefit under the policy. A substantial increase could cause the policyholder to have trouble meeting premium payments, in which case the policy would lapse and the investment could be lost.


For those clients who continue to shy away from equity investing, a whole life insurance policy can provide a viable alternative by offering guaranteed dividends and tax-deferred growth. It is, of course, important to examine each client’s financial position to determine whether the long-term investment required in the way of annual premiums is the best option in any given situation.

Source: LlifeHealthPRO, 18/07/12.


About the Author

William H. Byrnes, Esq.

Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow

Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media’s Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of ten books and treatises and seventeen chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

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He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).


Whole Life Insurance

Whole Life Insurance is a permanent form of life insurance that will provide a lifetime of protection with a level premium. Depending on the policy that you purchase, a whole life insurance policy can also act as a tax-efficient investment with strong cash values. Whole Life Insurance spreads the cost of your coverage over the lifetime of the policy, which keeps premiums lower than they would otherwise be. Additionally, there is an option to purchase certain Whole Life policies over the course of 10 or 20 years and spend the rest of your life protected.

Tax-Advantaged Investing Using Whole Life Insurance

One of the major features of both Whole Life and Universal Life insurance policies is the idea of having an investment inside the policy that is efficient when it comes to taxes. Whole life insurance in particular can accumulate a so-called cash value on top of its normal cost of insurance. This cash value is an investment component that gains interest at a rate determined by long-term financial projections.

The advantages of using a whole life insurance policy as an investment are many. Whole life insurance offers a very stable long-term investment. While it may not respond as quickly to short-term changes in the marketplace, whole-life insurance is very useful for meeting long-term financial goals because of its stable, guaranteed rate of return. The tax-advantaged aspect of a whole life insurance policy allows you to gain interest on funds you would normally be paying tax on. This allows you to grow your investments more efficiently.

Paying For Whole Life Insurance in 10 to 20 Years or Before Retirement

Basic Whole Life policies spread the payment for insurance over the estimated length of your life. This means that you’ll be paying your premiums even while retired. But as was touched on previously, there are some options when it comes to paying out the entirety of your policy earlier, while you have greater earning potential. The most common options are 10 and 20 year plans, as well as paying until the age of 65. In all cases, these payment plans spread insurance payments out over a smaller amount of time. Ultimately, the shorter the length of time, the higher the premiums, but the positive aspect of this is being done paying for your insurance coverage earlier.

Whole Life Insurance is a very stable, tax-efficient investment tool, as well as an excellent permanent life insurance policy. Whole Life Insurance can fit cleanly into your financial plan, but for obvious reasons the issues of balancing your investments, maintaining a lifestyle and planning for the future are as complex as ever. Because of this, we highly recommend talking with a financial advisor before you buy into a whole life insurance policy, or do any major financial planning.


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