What happens to cash value with a level death benefit?

Guardian The Whole Story of Whole Life Insurance Pub4085 (03/22) 2022-134047 (Exp. 03/24)

1 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

2 Riders may incur an additional cost or premium. Riders may not be available in all states.

3 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

4 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

5 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 outstanding 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 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

6 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

7 Paid-up Additions (PUA) are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy. Adding large amounts of paid-up additions may create a Modified Endowment Contract (MEC). A MEC is a type of life insurance contract that is subject to last-in-first-out (LIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution may also be subject to a 10% federal tax penalty on the gain portion of the policy if the owner is under age 59 ½. The death benefit is generally income tax free.

8 The HLV Theory states that one should maintain life insurance equal to the present value of their expected future earnings. Life insurance companies place limits on life insurance available to consumers based upon this formula and have created age-based multiples of current income as a guideline. For example, a person in their 30s may be insured for around 30 times their annual income, 20 times for a person in their 40s and 10 times for people in their 50s. Age 60 and over about 1 times net worth.

9 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

10 A Waiver of Premium rider waives the obligation for the policyholder to pay further premiums should he or she become totally disabled continuously for at least six months. This rider will incur an additional cost. See policy contract for additional details and requirements.

11 State creditor protection for life insurance policies varies by state. Contact your state’s insurance department or consult your legal advisor regarding your individual situation.

12 The Index Participation Feature (IPF) is a rider available with select Guardian participating whole life policies. With the IPF, policyholders can now allocate between 0% and 100% of the cash value of paid-up additions (PUA) to the IPF each year. The IPF provides an adjustment to the dividend paid under the policy. This adjustment, subject to the cap rate (currently 11%) and floor (currently 4%), may be positive or negative based on index performance. Adverse market performance can create negative dividend adjustments which may cause lower overall cash values than would otherwise have accrued had the IPF not been selected. While the adjustment provided by this rider is affected by an external index, it does not participate in any stock or equity investment of the external index. Rider Form Number: 15-IPR, 15-IPR MA.

The S&P 500 price return index is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by The Guardian Life Insurance Company of America (Guardian). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Guardian. The Index Participation Feature (“Product”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such Product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 price return index.  The cost of the IPF rider is currently 2% with a guaranteed rate of 3% on the IPF portion of the policy. Policy loans against, or withdrawals of, values allocated to the IPF could negatively impact rider performance. Selection of the IPF may restrict the use of certain dividend options.

13 Financial information concerning Guardian as of December 31, 2019, on a statutory basis: Admitted Assets = $62.2 Billion; Liabilities = $54.6 Billion (including $46.5 Billion of Reserves); and Surplus = $7.6 Billion.

Life insurance policies can be split into two types of plans.

Term Life Insurance has lower initial rates, but the premiums increase over time (see the pic below). These plans generally do not build a cash value

Permanent life insurance, has higher initial premiums but the cost is generally level (see the pic below) and offers a variety of cash accumulation options.

We have collected the most frequent questions related to cash accumulation by life insurance policies. Please enjoy the information below and let us know if you have additional questions.

Most permanent life insurance policies build a cash value. The reason behind this is that traditional permanent policies have a level premium that spans the insured’s lifetime. The insured is paying a higher premium in the early policy years, and in return, their premiums remain level throughout their lifetime. Traditionally, this extra premium was held in the form of a guaranteed cash value, which the insured could access via a policy loan or surrender.

There are several types of permanent life insurance policies:

1. Whole Life Insurance is often viewed as a simpler type of permanent insurance because its premiums are fixed and because it often offers guaranteed benefits so that you know exactly what you will receive.
   Many whole life policies also produce a dividend, which generates a variety of options for the insured.  Whole life insurance is generally sub divided into non-participating and participating whole life policies.  Non-participating whole life insurance policies do not generate an annual dividend for its policy holders. Participating whole life insurance policies do generate an annual dividend. The annual dividend allows the insured to share in the profitability of the insurance company. Dividend rates can fluctuate from year to year, and there is no guarantee that the company will pay a dividend in a given year.

1. Universal life insurance, another popular form of a cash value life insurance policy, separates the investment portion from the life insurance portion, and some policies literally offer dozens of investment options. The main difference from whole life insurance is that universal life insurance offers you more flexibility – you can decide what amount you want to contribute throughout the policy’s life, and you also have a wide variety of investment options.

1. Certain Term 100 life insurance policies also generate a guaranteed cash value that escalates at each policy anniversary.

Here is a quick comparison of all major life insurance types:

The cash value of a life insurance policy is value that your policy has accumulated since the policy issue date.  The policy owner can often access this value via the surrender of the policy, a loan or partial withdraw. Note that not all policies offer all the access to cash options, so the policy contract needs to be consulted.

The cash value within a permanent or whole life policy is often broken down into two parts: the guaranteed cash value and the dividend cash value.

1. The guaranteed cash value can be taken out as a policy surrender or as a policy loan.
2. The dividend value, which exists only in participating whole life policies, can be taken out as a withdrawal policy surrender or policy loan.

The amount available via loan and loan interest rate formulas varies from company to company and even contract to contract, so make sure you understand your policy.

The cash surrender value of life insurance is basically the same as the cash value of a life insurance policy. It is an amount that an insurance company pays when you decide to “surrender” your insurance policy back to the insurance company. In this context, “surrender” is another word for terminate or return. Thus, it is a cash value that your policy has accumulated since its inception.

Buyer beware – certain policies have policy fees and surrender charges. This amount will be deducted from the cash you receive.  Also, be aware of any potential taxable gains.  If you have questions, be sure to ask and get your answers in writing.

An example on the left illustrates where you should be searching for this value in your policy. A section called guaranteed cash value highlights the amount your policy has accumulated over time.

If you are not sure about the number, your insurance company or insurance broker should be able to provide this figure.  Make sure you get it in writing.

The cash value in term life insurance is generally zero since traditional term insurance does not have a cash accumulation component.

Cashing out life insurance is easy – you will need to let your insurance company know that you want to surrender your policy. It is important to know, though, that before you do that, you should read all the details of your policy to understand the financial consequences and, in particular, what will be your “net surrender cash value,” inclusive of any fees.  For whole life policies, consider surrendering after the annual dividend has been declared, otherwise you may be leaving money on the table.

Buyer beware – Be aware of any potential tax consequences from the surrender of your policy and review your life insurance needs with a qualified life insurance broker first.

Most cash value policies have a policy loan feature.  The insurance company is essentially letting you borrow this value while keeping the policy in force.  But this comes at price; each insurance company and each policy contract has a stipulated interest rate.  Be sure to verify what that is. 

Please see an example on the left of a policy statement that also includes a loan.

Buyer Beware – If your loan value escalates beyond a certain point (often 90 per cent), the policy can terminate because the loan intertest rate is typically higher than the dividend paid with whole life policies.

That’s where you should be really careful. It is EXTREMELY important to know that, if you die, depending on the type of policy:

• In most cases your beneficiary will not receive the entire cash value on death of the insured. For instance, participating whole life policies often have a paid-up additions option (PUA) in which case the dividends purchasing more insurance pay out on top of the basic death benefit. However, the guaranteed cash value on these policies remains with the insurance company.
• With universal life insurance, it depends on the type of policy – some policies have level death benefits, and some policies have an increasing death benefit (the face amount plus the accumulated funds). 

If you want to cancel your cash value life insurance, it basically means that you are “surrendering” it. There will be a net amount that you will receive when cancelling, called the surrender value. This takes into account any fees or surrender charges.  This amount does not factor into any taxable gains which may apply. Buyer Beware – many Permanent life insurance policies have surrender penalties on the cash value some extending as long as 15 years.  It is linked to the cash value your policy has accumulated over time.