Whole Life

Whole life insurance provides permanent death benefit coverage for the duration of the life of the insured. The premium paid in the policy consist of a death benefit and a savings component in which cash value may accumulate on a tax-advantaged basis. These policies are known as permanent life insurance.

Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for regular level premium payments. In the savings component, also known as cash value, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance.

To build excess cash value, a policyholder can make payment 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. 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. 

To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer. Also, the owner may withdraw funds tax-free up to the value of total premiums paid. Loans that are unpaid will reduce the death benefit by the outstanding amount.

Withdrawals and unpaid policy loans reduce the cash value of the policy. The cash value can be reduced or completely wiped out. While some policies are reduced on a dollar-for-dollar basis with each withdrawal, others (such as some traditional whole life policies) may actually reduce the death benefit by an amount greater than what is withdrawn.