A whole life insurance policy is one can keep for as long as you live and that will pay the face amount to your beneficiaries. Both variants of a whole life insurance policy – participating and non-participating polices have an attractive feature: it has a cash value. Cash value is a built-in savings element. If you keep a whole life insurance policy for a specific period of time, the policy will build up guaranteed cash values which pay a guaranteed interest rate each year accumulating a considerable sum over time. The cash value in a whole life insurance policy earns interest of about 6% a year and is tax deferred. You have to pay the taxes only when you withdraw money from the cash value.
When you pay the premium, a part of the premium is used to pay for the coverage. The remaining part is added to the cash value. In the beginning the majority of your premium payment will go toward the cash value. As you get older, more and more of your premium will start going toward the coverage. The premium remains the same through out but the amounts paid towards the cash value and the coverage changes over time. The cash value grows more slowly as you get older.
The cash value is the amount the policy is worth if you surrender or cancel the policy during your life time. However the cash value will be less than the death benefit. Generally, you can borrow money against the cash value of a whole life insurance policy, if there is sufficient cash value in the policy to secure the loan. You can also surrender a whole life insurance in certain circumstances. The surrender value is determined by the current cash value less any outstanding loans or unpaid premiums. Whole life insurance is considered an investment vehicle and dividend amount that is greater than the premium will be taxed. The same holds true for cash value if the policy is surrendered for cash value. You can also withdraw money under some circumstances — but this may reduce the benefit value of the policy. You should buy a whole life insurance policy if you anticipate having a relatively large estate as you grow older. Because the cash value builds quickly while you’re young, you can use that cash value to pay the premiums when you retire. This can decrease the benefit value, but there will generally be enough left over to cover the estate taxes when you pass on.
