How To Accelerate the Cash Value Growth Within a Whole Life Policy

Whole Life insurance provides fixed premiums, guaranteed death benefits and cash value to access in the form of loans or withdrawals.1

For individuals looking to utilize a whole life insurance policy as a supplement to fund retirement savings, the most common concern and focus revolves around the low initial growth generated within the policy due to policy expenses. There is however, an effective way to increase the value of cash value during those early years - The Paid Up Additions Rider.

A policy with a paid-up additions rider will allow the policyowner to make additional contributions specifically to increase the cash value growth. These contributions can vary year to year in value, depending on the needs of the policyowner as well as proper monitoring by the life insurance agent. Annual reviews are important with such a policy because there are specific caps set in place by the Internal Revenue Service. The avoidance of the policy becoming a Modified Endowment Contract (MEC)2 is critical for the policyholder, since there are many negative tax consequences if any distributions are made.

Another important factor to consider when deciding upon which company to purchase a whole life policy is whether or not they are a mutual life insurance company. A mutual life insurance company is privately owned by its policyholders and may pay an annual dividend to assist with policy value and growth.3 This varies from a publicly traded stock company that issues its profits to the owners of its stock traded on the exchanges. A paid-up additions rider on a whole life policy will increase cash values on which dividends are based and will help grow even more cash value.

Utilizing a paid up additions rider on a whole life policy can effectively serve the interests of the person using it within their retirement saving portfolio. By adding value and flexibility to the policy along with the solid guarantees offered by a whole life policy, this rider could provide additional cash value growth to aid in supplementing retirement. Always speak with your financial professional about whether this may be a viable solution to your long term financial plan.

[1] Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 1/2 any taxable withdrawal is also subject to a 10% tax penalty.
[2] A Modified Endowment Contract (MEC) is a type of life insurance contract that is subject to first-in-first-out (FIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution is also subject to a 10% tax penalty on the gain portion of the policy if the owner is under age 59 1/2. The death benefit is generally income tax free.
[3] Dividends are not guaranteed. They are declared annually by Guardian's Board of Directors.

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