 Personal finance powerpoint presentation, whole life insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia, Whole Life Insurance, which can be found online. Take a look at the references, resources, continue your research from there. This is by Julia Kagan, updated March 3, 2022. In prior presentations, we've been looking at insurance in general, moving then to the life insurance, noting there's two major categories of life insurance. We think about one being the term or pure life insurance, the other being permanent life insurance, and now we're thinking about whole life insurance, which is in the category of the permanent life insurance. Also note that whenever you're thinking about different formats or kinds of life insurance, you would probably want to harken back to the pure life insurance, the term life insurance, because that's the most straightforward kind of life insurance, keeping the adage in our mind of why don't I just buy the cheaper term life insurance and then invest the difference. So you want to keep that adage in mind so that when you have more complex strategies, you got to think about what is by goal of these more complex strategies, and I would try to argue against or try to think of a rationale over and above why I shouldn't be just purchasing the term insurance, the cheaper insurance, and then investing the difference. Okay, so what is whole life insurance? Whole life insurance, also known as traditional life insurance, provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also continues a savings component in which cash value may accumulate. So that's kind of like the savings component, which you could think about like kind of an investment component, which you want to be thinking and comparing to the pure life insurance, saying, why don't I buy just the pure life insurance, which is cheaper and invest the difference in a savings account, or in an IRA or something like that. And there could be reasons for it, but you want to know what your strategy is to be picking up save something a little bit more complex than save your life insurance. There might be tax benefits, there might be benefits for estate planning, for example. So interest accrues at a fixed rate and on a tax deferred basis, whole life insurance policies are one type of permanent life insurance. So now the major categories, the term versus the permanent, we're on the permanent life insurance side of things, universal life, indexed universal life and variable universal life are others. So whole life insurance is the original life insurance policy, but whole life does not equal permanent life insurance as there are many types of permanent life. Understanding whole life insurance, whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level regularly due premium payment. So obviously we're going to be putting in paying the premium payments in order to get primarily the life insurance component being the death benefit, which means that if we were to die prematurely, which is the point, we're safeguarding the people that are being dependent on us in some way and having the death benefit, which would be paid out at that time. The policy includes a savings portion called the cash value. This is kind of like the investment component of it alongside the death benefit and the savings component interest may accumulate on a tax deferred basis. So you got kind of a tax benefit item going on here, which might be one of your rationals to be putting money into it. But as you do, you might be thinking the old adage of why don't I just buy the cheaper term and invest the difference? If you could invest the difference in say like an IRA or in a 401k plan, then you might get, you know, a similar kind of a tax benefit there in the growth of the funds and a deferral kind of in that situation as well. So maybe those things, maybe those tools are capped out or maybe you have some other kind of conjoining reason for putting the money into the life insurance, which has that kind of saving component. But those are the things to keep in mind. Growing cash value is an essential component of whole life insurance to build cash value as policyholder can remit payments more than the schedule premium known as paid up additions or PUA. Policy dividends can also be reinvested into the cash value and earn interest. The cash value offers a living benefit to the policyholder. So in other words, if you buy normal, pure life insurance, term life insurance, you don't really have a living benefit to you at that point of time because there's no investment point. You're just safeguarding against you dying, which is when the life insurance would pay out in the event that that happens. So over time, the dividends and interest earned on the policy's cash value will often provide a positive return to investors growing larger than the total amount of premiums paid into the policy. In essence, it serves as a source of equity. So in so to access cash reserves, the policyholder requests a withdrawal of funds or a loan. So in other words, now you can have this cash reserve component to it. And then there could be some restrictions now that so you might be saying, well, why why would I put it there? Why don't I just have by the by the term life insurance and then put the money into a savings account because it's usually going to be a little bit easier for me to access the money. You would think to a savings accounts, you might have more restrictions if it's under the life insurance. But there might be tax planning purposes for that estate planning purposes for the life insurance. But once it's in there, like with an IRA, for example, there might be limitations or some limitations in terms of how to access it. You might be able to withdraw the cash value of the funds or you can possibly borrow against it, which is kind of a funny option because normally if you're not allowed to pull the money out, you can't really take a loan and use it as collateral because that's kind of the same thing as pulling the money out. But if it's a loan, then you'll have to pay interest on it. So that could be like a safety net type of thing that you can have in the event that you really need cash that you have the ability to possibly take the money out and or take a loan against it. So interest is charged on the loans with rates varying per insurer. Also the owner may withdraw funds tax-free up to the value of the total premiums paid. So unpaid loans will reduce the death benefit by the outstanding amount. Withdrawals and unpaid policy loans reduce the cash value of the policy. Depending on the policy type and the size of its remaining cash value, a withdrawal could moreover chip away at the death benefit or even wipe it out altogether. So while some policies are reduced on a dollar for dollar basis with each withdrawal, others such as some traditional whole life policies may reduce the death benefit by an amount greater than what is withdrawn. So in other words, if one of the ways it might be set up is if you pull the money out of the cash value of the life insurance, it could have an impact then on the death benefit, which is the benefit that the recipients would be receiving at the point of your death, which is kind of the point of the life insurance. So you can see how that the pendulum swings as you start to mess with the cash value. So special considerations, the death benefit is typically a set amount of the policy contract. Some policies are eligible for dividend payments and the policyholder may elect to have the dividends purchase additional death benefits, which will increase the amount paid at the time of death. Death proceeds are non-taxable to the beneficiary and are therefore not part of taxable gross income, meaning if you were to die, the policy pays out to your beneficiary, then typically that money to them, do they have to record it in income? Generally the answer would be no because it's part of the insurance, the insurance so on. So the death benefit can also be affected by certain policy provisions or events. For example, unpaid policy loans, including accrued interest, reduce the death benefit dollar for dollar. Alternatively, many insurers offer voluntary riders. So we got the riders that can come into play for a fee that secure or guarantee coverage, including the stated death benefit. For example, two of the most common are the accelerated death benefit and waiver of premium riders, which protect the death benefit if the insured becomes disabled or critically or terminally ill and are unable to remit premiums. So many policies allow the policyholder to designate that the funds from the policy be held in an account and distributed in allotments rather than as a lump sum. So interest earned on the holding account will be taxable and should be reported by the beneficiary also. So now you've got in the event, usually the death benefit that if it goes out to someone would be something that they wouldn't have to report possibly, but if you give it to them in distributions and the benefits are then earning money after the point in time of the death, for example, then the interest that would be accrued you would think might have a taxable component to it. Also, if the insurance policy was sold before the death of the insured, there may be taxes issued on the proceeds from that sale. So as is the case with many kinds of permanent policy, it's important to thoroughly research all insurers being considered to ensure that they're among the best whole life insurance companies currently operating. So clearly when you think about insurance, you want to be thinking I would compare everything back to the term the pure insurance and have a rationale in your mind as to why you wouldn't do the old adage of just buying insurance, straight term insurance, which would be cheaper generally, and then invest the difference and possibly investing in tax advantage ways, possibly in iris and so on 401k plans if you have the capacity. And then try to think about, you know, is there some reason over above that that I'm putting the money into the whole life policy, which is possibly a more complex tax strategy and or some other way to hedge that I think would be worthwhile with the whole life or possibly a state planning purposes, so that when you talk to someone in a company who's basically a salesperson that they're more likely to possibly edge you, I would say to a whole life policy or something like that, because they're more expensive. And if they're making a commission on it, then they might make a higher commission for that. So you want to that doesn't mean they're not good at what they're telling you or what they're telling you isn't true, but it does mean that they seem to have at least an appearance of financial bias. And therefore you want to do your research before going in. So you have a good idea of what's going on. So examples of whole life insurance for insurers, the accumulation of cash value writers, their net income of risk. For example, ABC insurance issues a 25,000 life insurance policy to S Smith, the policy owner and insured. So Smith then owns the policy and is the one that is insured. So then over time, the cash value accumulates to $10,000 upon Mr Smith death, ABC insurance will pay the full the full death benefit of 25,000. However, the company will only realize a loss of 15,000 due to the 10,000 accumulated cash value. The net amount of risk at issue was 25,000. But at the death of the insured, it was 15,000 because of that accumulation of the cash value. So history of the whole life insurance from the end of World War Two through the late 1960s whole life insurance was the most popular insurance product policies secured income for families in the event of the untimely death of the insured and help subsidize retirement plans. So obviously, so after the process after the passing of the Tax Equity and Fiscal Responsibility Act, the TEFRA in 1982, many banks and insurance companies became more interest sensitive. Individuals weighed the benefits of purchasing whole life insurance again, against investing in the stock market were annualized return rates for the S and P 500 were were adjusted for inflation 14.76% in 1982 and 17.27% in 1983. So in other words, if you if you're putting your money into the into the whole life at a point in time, when you have interest rates that are relatively high interest rates and interest rates were higher, like in the 70s, for example, and you might be coming out still being, you know, after the war people were kind of more conservative after the depression people were more conservative on their on their on their investing possibly. And so the interest the interest rates you might be getting could be thought of possibly as more reasonable return. And current times the interest rates are have been a lot lower. So you would think that if you were to invest somewhere else, in other words, if you were to buy just normal term insurance and which would might be cheaper and invest somewhere else, then you you might be able to get a much higher return if you were to invest in the stock market, although investing in the stock market also comes along with more risk involved as well. You could though put money just into other things that could basically be generating generating interest or different like bonds or something like that, or just in a savings account or CD account, and possibly getting higher interest rates than you would be getting from maybe the the life insurance. So those are just things to consider on like the investment side of thing. So the majority of individuals then began investing in the stock market and term life insurance rather than whole life insurance at that point. So what is the difference between whole life and term life insurance, as its name suggests term life insurance provides a death benefit for a specific period. So it's just purely life insurance. This type of life insurance unlike whole life policy does not have a savings component to it. So you're not dealing with that savings components just life insurance. At the end of the term the policy terminates. Some insurers allow the policy holder to convert to convert their term policy to whole life or renew for a longer term. Whole life insurance is a type of permanent life insurance that provides coverage for the life of the insured. A whole life insurance policy holder can also build cash value in the saving component of the policy. What is the difference between universal and whole life insurance? Universal life insurance and whole life insurance are both permanent life insurance types that offer guaranteed death benefits for the life of the insured. However, a universal life policy allows the policy holder to adjust the death benefit as well as the premiums. As one might expect higher death benefits require higher premiums. Universal life policy holders can also use their accumulated cash value to pay premiums provided the balance is sufficient to cover the minimum due. Whole life insurance alternatively does not allow for changes to the death benefit or premiums which are set upon issue. How much is whole life insurance? The cost of whole life insurance varies and is based on several factors such as age, occupation and health history that as you would think and we've talked about this a bit in prior presentations kind of general health factors and those kind of things you would think would be in the actuarial calculations to help them calculate the premiums. Older applicants typically have higher rates than younger applicants insured insured with a stellar health history typically have better rates than those with history of health challenges. The face amount of coverage also determines how much a policy holder will pay the higher the face amount the higher the premium. Interestingly, certain companies have higher rates than others independent of the applicant and their risk profile. It's also worth noting that for the same amount of coverage whole life insurance is more expensive than term life insurance term life insurance is the cheaper one because it's just life insurance generally that's the baseline that you want to be comparing to in my perspective variable whole life insurance is based on what type of premium variable life insurance premiums can be fixed or variable allowing the policy holder to remit a premium payment of no less than what is required to cover fees and expenses e.g mortality and expenses. So a cash value builds as cash value builds through the remittance of premiums and accumulation of interest the net risk to the insurer decreases as a result associated fees and expenses may decrease reducing the minimum premium needed to cover such charges. Alternatively, some insurers outfit their policies with a lapse protection feature which prevents the policy from lapsing due to insufficient cash value as long as certain level premiums are paid over a specific period. What is modified whole life insurance then what's modified whole life modified whole life insurance is permanent life insurance in which premiums increase after a specific period usually after five or 10 years the premiums increase but remain constant thereafter. Traditional whole life insurance premiums in contrast remain the same throughout the life of the policy.