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    Whole life insurance rates

    hat is the reason for buying a “whole life” insurance policy? As the name implies, “whole life” insurance is meant to last for your entire life. This is the opposite of a temporary life insurance policy that covers a specific amount of time such as a 10-, 20-, or 30-year term. There are many good reasons for purchasing a whole life policy. The whole life policy never expires and in most cases, the premium doesn’t increase over the life of the policy. Some policies also build cash value that you can borrow from. Want a little help finding the right policy? Here are some of the best options for whole life insurance.
    01 Best Whole Life for Building Cash Value: MassMutual
    Death benefits are guaranteed through the MassMutual whole life policy, which means the beneficiary of your life insurance policy receives a lump sum cash payment regardless of when you die. Cash value benefits build over the life of the policy. If you are looking to use your life insurance as a supplement for your retirement income, the cash value of a whole life insurance policy can help contribute as a source of income. The MassMutual whole life policy also offers policy dividends, meaning you earn cash dividend payments annually. MassMutual is “A++” rated by A.M. Best and Insure.com rates MassMutual highly in the area of “value for the price.”
    How does morbidity rate come into play?
    02 Best Whole Life for Pricing: Northwestern Mutual
    Northwestern Mutual
    Northwestern Mutual is the largest direct writer of life insurance in the United States. It offers policy dividends payments for its whole life insurance policy. Northwestern Mutual received a 4-out-of-5 score in a recent customer satisfaction rating from J.D. Power & Associates. The waiver of premium rider from Northwestern Mutual is available, which pays your insurance premium should you suffer a disabling injury. Premiums are guaranteed not to increase and the whole life policy from Northwestern accumulates cash value that is tax-deferred. Northwestern Mutual’s whole life insurance rates are very competitive, particularly for seniors.
    03 Best Whole Life for Dividend Returns: New York Life
    New York Life
    New York Life has consistently received the highest financial strength rating from four major insurance rating organizations (A.M. Best, Fitch Ratings, Standard & Poor’s and Moody’s Investor Services). Why is financial strength important in your life insurance company? The financial strength of an insurance company shows its ability to meet financial obligations and pay any claims presented. For policyholders, this means higher dividend payments.
    04 Best Whole Life for Optional Benefits (Riders): MetLife
    MetLife received the No. 2 ranking in customer satisfaction from J.D. Power & Associates. The MetLife whole life insurance policy offers a guaranteed level premium and cash value benefits. Dividend payments are earned starting with the second year term of the policy. MetLife gives policyholders the options of adding more coverage to the basic policy by something called a policy rider. Several policy riders are available: The Enrichment Rider (option to add more coverage and cash value over time as you need it); Accident Death Benefit (additional payment for a death as the result of an accident); Child Term Rider (coverage added for your children); Enhanced Care (cash value available for prolonged illness with access to up to 90 percent of the policy value); Flex Term Rider (a term life policy can be added that adds to the coverage for a period of time); and the Disability Waiver (premium is waived for a disability of six months or more).
    05 Best Whole Life for Final Expense Coverage: Transamerica
    Transamerica’s whole life insurance policy is available in amounts up to $50,000. Group whole life insurance is also available through your employer as a voluntary benefit in amounts up to $25,000. Small whole life insurance policies are available through Transamerica designed to cover funeral costs and other final expenses. Premiums are guaranteed for life as long as you keep paying your premium. Cash accumulation (tied to the performance of investments) is available that can be borrowed from and the tax payable on cash accumulation can be deferred. The accelerated death benefit pays a portion of the policy’s death benefits if you have a terminal illness, chronic illness or a critical illness such as a heart attack or stroke after your policy goes into effect. Transamerica has an “A+” financial strength rating from A.M. Best.
    06 Best Whole Life for No Medical Exams: Mutual of Omaha
    Mutual of Omaha
    Mutual of Omaha does not require a medical exam for coverage and offers whole life insurance in values from $2,000 to $25,000. Whole life insurance policies are available for individuals aged 45 to 85 (in NY, 50 to 75). Children’s whole life insurance is also available. Mutual of Omaha has an “A+” financial strength rating from A.M. Best. There is a graded death benefit for the first two years of the policy, meaning, if during the first two years of the policy the death results from natural causes, the beneficiary receives all premiums paid plus 10 percent. For death by accidental injury, full benefits are available as soon as the policy becomes effective. Coverage is guaranteed for as long as you continue to pay your policy premium. Since Mutual of Omaha is a mutual firm, it pays back policyholders in the form of dividend payments.
    07 Best Whole Life for Cash Value Options: Guardian
    In addition to paying policy dividends, Guardian also excels at options available to customers looking to accumulate cash value. In fact, there are eight different cash value options, far more than other life insurers. Guardian has an “A++” financial strength rating from A.M. Best. The whole life policy through Guardian offers guaranteed premium, cash value accumulations, potential dividend payments and tax benefits such as being able to defer paying taxes and the dividends accumulating on your policy. Also, if you have to borrow against your policy, the loan may not count as income for tax purposes. Several riders are available, including waiver of premium, enhanced accelerated death benefit, guaranteed insurability and the accidental death benefit.
    08 Best Whole Life for Paying off Your Premium Early: State Farm
    Courtesy of State Farm
    A whole life insurance policy from State Farm has many benefits, including lifetime coverage, access to cash value (tax deferred), guaranteed death benefit and level premium amounts over the life of the policy. Policy limits are available up to $100,000. State Farm also has what they call “Limited Pay Life Plans” for 10, 15 or 20 years. What this means is that you can completely pay for your life insurance premium for the term you choose, in 10, 15 or 20 years. This will help you avoid having to pay life insurance premiums during your retirement.
    You are eligible to earn dividend payments but these are not guaranteed. If you are looking for a value in whole life insurance, State Farm offers more policy discounts than many other insurers; (67 percent vs. 40 percent for the industry average). State Farm offers online quoting for its whole life policy. State Farm is “A++” rated by A.M. Best and has the highest rating from J.D. Power & Associates in the area of customer satisfaction.
    When you have children, many people tell you it’s important to buy life insurance to protect your family.
    You’ll have two options:
    Term Life Insurance. Term life is a life insurance product that covers a limited term in return for a constant monthly premium over the covered term. For someone who is 30 years old, premiums can be less than $75 per month.
    Whole Life Insurance. Whole life is a hybrid investment and insurance product that covers you until death. For someone who is 30 years old, the premiums can be less than $800 per month, and they don’t change over the life of the policy.[1]
    Whole life insurance is a more complicated product than term life insurance. Like universal life or variable universal life insurance, whole life offers an insurance payout and, over time, the policies accrue a cash value that can be withdrawn.
    Typically, a whole life policy’s cash value increases by a guaranteed minimum per year and by a larger, “expected” amount that varies each year with changes in the financial markets. Term life insurance does not offer a cash value. It only serves to insure you against death during the policy’s term.
    The cash value helps financial advisors and insurance agents position whole life insurance as a type of investment product. We believe whole life does not make sense as an investment product.
    How the math works: whole life vs. term life
    To understand why, consider the analysis in Table 1 that compares the annual premiums and expected values associated with $1 million whole and term life insurance policies. The analysis shows what would happen if you took the difference in premiums between a whole life insurance policy and a term life insurance policy and invested it, with the return you could expect from a diversified investment portfolio like those Wealthfront offers. We then compared the ultimate value of the saved premiums, including those expected returns, with the cash value of the whole life product over the same period of time.
    Table 1.
    Difference Between Whole Life & Term Life Insurance
    Whole Life Term Life Difference
    Annual Premium $8,230 $672 $7,558
    Expected Value after 20 years $236,679 $313,939
    In this example – which we developed using a term life quote and a whole life illustration, or policy explanation, from MetLife, a high-quality insurance company – a 30-year-old male has a choice between whole life insurance and term life insurance for a period of 20 years. The whole life insurance has an annual premium of $8,230 per year (you can pay monthly but it costs slightly more). The 20-year term life insurance costs $672 per year.
    After 20 years the expected cash value of the whole life policy (the amount you could withdraw) is $236,679.
    If you invested the difference between the two premiums in a Wealthfront account using an allocation based on our clients’ average risk tolerance, you would expect the difference in premiums to grow to $313,939 over 20 years[2], which represents an additional $77,260 or 33% over the expected cash value at the same point in time for your whole life insurance policy.
    The shorter the term you want to insure, the greater the difference in value. After 10 years, the expected cash value of the whole life insurance policy is $70,871, while the expected outcome from term life plus an investment portfolio would be $108,355 – 52% more.
    The difference in the ultimate value of the two approaches is due to the high fees insurance companies pay to distributors (which is why these policies are pushed so hard by financial advisors and insurance agents) and the extra profits to the insurer.
    To be fair to the insurance companies, whole life insurance covers you until you die. Therefore, if you think there is a reasonable chance you could die in your 50s (i.e. more than 20 years after you buy the policy), whole life insurance could be a better bet.
    Whole life insurance also offers a guaranteed minimum cash reserve value. In the case portrayed in Table 1, the guaranteed minimum cash value is $190,000. If you think the markets are not likely to appreciate over the next 20 years then whole life insurance is a better deal. If you think you’re likely to live into your 60s or that capital markets are likely to appreciate, even modestly, term life insurance is a much better deal.
    Why buy insurance?
    Life insurance financially protects your loved ones in the unlikely event you or your spouse dies before your family builds a significant net worth. You want to have enough in assets, so that your family could pay off the mortgage and maintain your standard of living, even if one or both parents dies.
    You want to buy the most cost effective bridge from your current state until the point at which it’s likely your family would have enough in assets to cope with that kind of change. If you work in Silicon Valley, chances are you’ll need a policy for no more than 20 years, because you should be able to develop an equity stake worth at least $1-$2 million in that time span if you follow our career advice and earn an equity stake consistent with the industry standards we show in our startup compensation tool.
    If you look to join a company with momentum, you have a very good chance of garnering a 0.1% stake in a business that could be worth at least $1 billion if it goes public (i.e. $1 million to you). It will also put you into position to later earn a much larger equity position at a hot startup that could earn you well more than that.
    Over 20 years you should have at least five shots at a big outcome. Managed well, your equity stakes should be able to supply your required reserve. When you feel comfortable with your reserve, you can cancel your term life insurance policy without a penalty.
    This analysis shows you why whole life insurance doesn’t generally make sense as an investment product, especially for families in Silicon Valley. Brokers and advisors who are paid high commissions on whole life insurance policies try to take advantage of your desire to protect your family in order to sell you whole life insurance. But, you don’t have to fall for their pitch.
    [1]We’re basing our estimates of prices on quotes from several major life insurance companies.
    [2]This assumes a base annual return of 5.72% (please see the Projected Performance chart with a risk level of 7) and an additional 1.4% per year after-tax return from continuous tax loss harvesting. That translates to a total annual return of 7.12% (5.72% + 1.40%). These expected Wealthfront returns are net of all fees.
    Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security or insurance product. Wealthfront is not a licensed insurance agent.
    Past performance is no guarantee of future results, and any hypothetical returns, expected returns, or probability projections may not reflect actual future performance. There is a potential for loss as well as gain that is not reflected in the hypothetical information portrayed. Actual investors on Wealthfront may experience different results from the results shown.
    Death benefit
    The death benefit of a whole life policy is normally the stated face amount. However, if the policy is «participating», the death benefit will be increased by any accumulated dividend values and/or decreased by any outstanding policy loans. (see example below) Certain riders, such as Accidental Death benefit may exist, which would potentially increase the benefit.
    In contrast, universal life policies (a flexible premium whole life substitute) may be structured to pay cash values in addition to the face amount, but usually do not guarantee lifetime coverage in such cases.
    A whole life policy is said to «mature» at death or the maturity age of 100, whichever comes first.[2] To be more exact the maturity date will be the «policy anniversary nearest age 100». The policy becomes a «matured endowment» when the insured person lives past the stated maturity age. In that event the policy owner receives the face amount in cash. With many modern whole life policies, issued since 2009, maturity ages have been increased to 120. Increased maturity ages have the advantage of preserving the tax-free nature of the death benefit. In contrast, a matured endowment may have substantial tax obligations.
    The entire death benefit of a whole life policy is free of income tax, except in unusual cases.[3] This includes any internal gains in cash values. The same is true of group life, term life, and accidental death policies.
    However, when a policy is cashed out before death, the treatment varies. With cash surrenders, any gain over total premiums paid will be taxable as ordinary income. The same is true in the case of a matured endowment.[4] This is why most people choose to take cash values out as a «loan» against the death benefit rather than a «surrender.» Any money taken as a loan is free from income tax as long as the policy remains in force. For participating whole life policies, the interest charged by the insurance company for the loan is often less than the dividend each year, especially after 10–15 years, so the policy owner can pay off the loan using dividends. If the policy is surrendered or canceled before death, any loans received above the cumulative value of premiums paid will be subject to tax as growth on investment.
    It should be emphasized that, while life insurance benefits are generally free of income tax, the same is not true of estate tax. In the US, life insurance will be considered part of a person’s taxable estate to the extent he possesses «incidents of ownership.»[5] Estate planners often use special irrevocable trusts to shield life insurance from estate taxes.
    Personal and family uses
    Individuals may find whole life attractive because it offers coverage for an indeterminate length of time. It is the dominant choice for insuring so-called «permanent» insurance needs, including:
    Funeral expenses,
    Estate planning,
    Surviving spouse income, and
    Supplemental retirement income.
    Individuals may find whole life less attractive, due to the relatively high premiums, for insuring:
    Large debts,
    Temporary needs, such as children’s dependency years,
    Young families with large needs and limited income.
    In the second category, term life is generally considered more suitable and has played an increasingly larger role in recent years.
    Business uses
    Businesses may also have legitimate and compelling needs, including funding of:[6]
    Buy-sell agreements
    Death of key person[7]
    Supplemental executive retirement plans (S.E.R.P.)
    Deferred compensation
    While Term life may be suitable for Buy-Sell agreements and Key Person indemnification, cash value insurance is almost exclusively for Deferred Comp and S.E.R.P.’s.
    Level Premium
    Level premium whole life insurance (sometimes called ordinary whole life, though this term is also sometimes used more broadly) provides lifetime death benefit coverage for a level premium.
    Whole life premiums are much higher than term insurance premiums, but because term insurance premiums rise with increasing age of the insured, the cumulative value of all premiums paid under whole and term policies are roughly equal if the policy continues to average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve that is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans that are received income tax-free and paid back according to mutually agreed-upon schedules. These policy loans are available until the insured’s death. If any loans amounts are outstanding—i.e., not yet paid back—upon the insured’s death, the insurer subtracts those amounts from the policy’s face value/death benefit and pays the remainder to the policy’s beneficiary.
    Whole life insurance may prove a better value than term for someone with an insurance need of greater than ten to fifteen years due to favorable tax treatment of interest credited to cash values. However, for those unable to afford the premium necessary to provide adequate whole life coverage for their current insurance needs, it would be imprudent to purchase less coverage than is adequate as whole life insurance rather than purchase an adequate level of term to cover their current need.
    While some life insurance companies market whole life as a «death benefit with a savings account», the distinction is artificial, according to life insurance actuaries Albert E. Easton and Timothy F. Harris. The net amount at risk is the amount the insurer must pay to the beneficiary should the insured die before the policy has accumulated premiums equal to the death benefit. It is the difference between the policy’s current cash value (i.e., total paid in by owner plus that amount’s interest earnings) and its face value/death benefit. Although the actual cash value may be different from the death benefit, in practice the policy is identified by its original face value/death benefit.
    The advantages of whole life insurance are its guaranteed death benefits; guaranteed cash values; fixed, predictable premiums; and mortality and expense charges that do not reduce the policy’s cash value. The disadvantages of whole life are the inflexibility of its premiums and the fact that the internal rate of return of the policy may not be competitive with other savings and investment alternatives.
    Death benefit amounts of whole life policies can also be increased through accumulation and/or reinvestment of policy dividends, though these dividends are not guaranteed and may be higher or lower than earnings at existing interest rates over time. According to internal documents from some life insurance companies, the internal rate of return and dividend payment realized by the policyholder is often a function of when the policyholder buys the policy and how long that policy remains in force. Dividends paid on a whole life policy can be utilized in many ways.
    The life insurance manual defines policy dividends as refunds of premium over-payments. They are therefore not exactly like corporate stock dividends, which are payouts of net income from total revenues.
    Modified whole life insurance features smaller premiums for a specified period of time, followed by higher premiums for the remainder of the policy. Survivorship life insurance is whole life insurance insuring two lives, with proceeds payable after the second (later) death.The level premium system results in overpaying for the risk of dying at younger ages, and underpaying in later years toward the end of life.[8]
    The over-payments inherent in the level premium system mean that a large portion of expensive old-age costs are prepaid during a person’s younger years. U.S. Life insurance companies are required by state regulation to set up reserve funds to account for said over-payments, which represent promised future benefits, and are classified as Legal Reserve Life Insurance Companies. The Death Benefit promised by the contract is a fixed obligation calculated to be payable at the end of life expectancy, which may be 50 years or more in the future. (see non-forfeiture values)
    Most of the visible and apparent wealth of Life Insurance companies is due to the enormous assets (reserves) they hold to stand behind future liabilities. In fact, reserves are classified as a liability, since they represent obligations to policyholders.[9] These reserves are primarily invested in bonds and other debt instruments, and are thus a major source of financing for government and private industry.
    Cash values
    Cash values are an integral part of a whole life policy, and reflect the reserves necessary to assure payment of the guaranteed death benefit. Thus, «cash surrender» (and «loan») values arise from the policyholder’s rights to quit the contract and reclaim a share of the reserve fund attributable to his policy. (see #Example of non-forfeiture values below)
    Although life insurance is often sold with a view toward the «living benefits» (accumulated cash and dividend values), this feature is a byproduct of the level premium nature of the contract. The original intent was not to «sugar coat» the product; rather it is a necessary part of the design. However, prospective purchasers are often more motivated by the thought of being able to «count my money in the future.» Policies purchased at younger ages will usually have guaranteed cash values greater than the sum of all premiums paid after a number of years. Sales tactics frequently appeal to this self-interest (sometimes called «the greed motive»). It is a reflection of human behavior that people are often more willing to talk about money for their own future than to discuss provisions for the family in case of premature death (the «fear motive»). On the other hand, many policies purchased due to selfish motives will become vital family resources later in a time of need.
    The marketing of whole life (and other cash value policies) as a substitute for savings and investments is considered controversial in some circles. Sometimes the regulatory agencies forbid the use of the words «savings» or «investment» by sales people when describing life insurance, insisting that life insurance should only be for «protection» against the economic hazard of death.
    When discontinuing a policy, according to Standard Non-forfeiture Law, a policyholder is entitled to receive his share of the reserves, or cash values, in one of three ways (1) Cash, (2) Reduced Paid-up Insurance, or (3) Extended term insurance.
    Pricing methods
    All values related to the policy (death benefits, cash surrender values, premiums) are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue. This means that the insurance company assumes all risk of future performance versus the actuaries’ estimates. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if the actuaries’ estimates on future death claims are high, the insurance company will retain the difference.
    Non-participating policies are typically issued by Stock companies, with stockholder capital bearing the risk. Since whole life policies frequently cover a time span in excess of 50 years, it can be seen that accurate pricing is a formidable challenge! Actuaries must set a rate which will be sufficient to keep the company solvent through prosperity or depression, while remaining competitive in the marketplace. The company will be faced with future changes in Life expectancy, unforeseen economic conditions, and changes in the political and regulatory landscape. All they have to guide them is past experience.
    In a participating policy (also «par» in the United States, and known as a «with-profits policy» in the Commonwealth), the insurance company shares the excess profits (divisible surplus) with the policyholder in the form of annual dividends. Typically these «refunds» are not taxable because they are considered an overcharge of premium (or «reduction of basis»). In general, the greater the overcharge by the company, the greater the refund/dividend ratio; however, other factors will also have a bearing on the size of the dividend. For a mutual life insurance company, participation also implies a degree of ownership of the mutuality.[10]
    Participating policies are typically (although not exclusively) issued by Mutual life insurance companies. However, Stock companies sometimes issue participating policies. Premiums for a participating policy will be higher than for a comparable non-par policy, with the difference (or, «overcharge») being considered as «paid-in surplus» to provide a margin for error equivalent to stockholder capital. It should be emphasized that illustrations of future dividends are never guaranteed.
    In the case of mutual companies, unneeded surplus is distributed retrospectively to policyholders in the form of dividends. Sources of surplus include conservative pricing, mortality experience more favorable than anticipated, excess interest, and savings in expenses of operation.[11]
    While the «overcharge» terminology is technically correct for tax purposes, actual dividends are often a much greater factor than the language would imply. For a period of time during the 1980s and ’90’s, it was not uncommon for the annual dividend to exceed the total premium at the 20th policy year and beyond.[12] {Milton Jones, CLU, ChFC}
    With non-participating policies, unneeded surplus is distributed as dividends to stockholders.
    Indeterminate premium
    Similar to non-participating, except that the premium may vary year to year. However, the premium will never exceed the maximum premium guaranteed in the policy. This allows companies to set competitive rates based on current economic conditions.
    A blending of participating and term life insurance, wherein a part of the dividends is used to purchase additional term insurance. This can generally yield a higher death benefit, at a cost to long term cash value. In some policy years the dividends may be below projections, causing the death benefit in those years to decrease.
    Limited pay
    Limited pay policies may be either participating or non-par, but instead of paying annual premiums for life, they are only due for a certain number of years, such as 20. The policy may also be set up to be fully paid up at a certain age, such as 65 or 80.[13] The policy itself continues for the life of the insured. These policies would typically cost more up front, since the insurance company needs to build up sufficient cash value within the policy during the payment years to fund the policy for the remainder of the insured’s life. With Participating policies, dividends may be applied to shorten the premium paying period.
    Single premium
    A form of limited pay, where the pay period is a single large payment up front. These policies typically have fees during early policy years should the policyholder cash it in.
    Interest sensitive
    This type is fairly new, and is also known as either «excess interest» or «current assumption» whole life. The policies are a mixture of traditional whole life and universal life. Instead of using dividends to augment guaranteed cash value accumulation, the interest on the policy’s cash value varies with current market conditions. Like whole life, death benefit remains constant for life. Like universal life, the premium payment might vary, but not above the maximum premium guaranteed within the policy.[14]
    Whole life insurance typically requires that the owner pay premiums for the life of the policy. There are some arrangements that let the policy be «paid up», which means that no further payments are ever required, in as few as 5 years, or with even a single large premium. Typically if the payor doesn’t make a large premium payment at the outset of the life insurance contract, then he is not allowed to begin making them later in the contract life. However, some whole life contracts offer a rider to the policy which allows for a one time, or occasional, large additional premium payment to be made as long as a minimal extra payment is made on a regular schedule. In contrast, universal life insurance generally allows more flexibility in premium payment.
    The company generally will guarantee that the policy’s cash values will increase every year regardless of the performance of the company or its experience with death claims (again compared to universal life insurance and variable universal life insurance which can increase the costs and decrease the cash values of the policy). The dividends can be taken in one of three ways. The policy owner can be given a cheque from the insurance company for the dividends, the dividends can be used to reduce the premium payment, or the dividends can be reinvested back into the policy to increase the death benefit and the cash value at a faster rate. When the dividends paid on a whole life policy are chosen by the policy owner to be reinvested back into the policy, the cash value can increase at a rather substantial rate depending on the performance of the company.
    The cash value will grow tax-deferred with compounding interest. Even though the growth is considered «tax-deferred,» any loans taken from the policy will be tax-free as long as the policy remains in force. In addition, the death benefit remains tax-free (meaning no income tax and no estate tax). As the cash value increases, the death benefit will also increase and this growth is also non-taxable. The only way tax is ever due on the policy is (1) if the premiums were paid with pre-tax dollars, (2) if cash value is «withdrawn» past basis rather than «borrowed,» or (3) if the policy is surrendered. Most whole life policies can be surrendered at any time for the cash value amount, and income taxes will usually only be placed on the gains of the cash account that exceeds the total premium outlay. Thus, many are using whole life insurance policies as a retirement funding vehicle rather than for risk management.
    Cash values are considered liquid assets because they are easily accessible at any time, usually with a phone call or fax to the insurance company requesting a «loan» or «withdrawal» from the policy. Most companies will transfer the money into the policy holder’s bank account within a few days.
    Cash values are also liquid enough to be used for investment capital, but only if the owner is financially healthy enough to continue making premium payments (Single premium whole life policies avoid the risk of the insured failing to make premium payments and are liquid enough to be used as collateral. Single premium policies require that the insured pay a one time premium that tends to be lower than the split payments. Because these policies are fully paid at inception, they have no financial risk and are liquid and secure enough to be used as collateral under the insurance clause of collateral assignment.)[15] Cash value access is tax free up to the point of total premiums paid, and the rest may be accessed tax free in the form of policy loans. If the policy lapses, taxes would be due on outstanding loans. If the insured dies, death benefit is reduced by the amount of any outstanding loan balance.[16]
    Internal rates of return for participating policies may be much worse than universal life and interest-sensitive whole life (whose cash values are invested in the money market and bonds) because their cash values are invested in the life insurance company and its general account, which may be in real estate and the stock market. However, universal life policies run a much greater risk, and are actually designed to lapse. Variable universal life insurance may outperform whole life because the owner can direct investments in sub-accounts that may do better. If an owner desires a conservative position for his cash values, par whole life is indicated.
    Reported cash values might seem to «disappear» or become «lost» when the death benefit is paid out. The reason for this is that cash values are considered to be part of the death benefit. The insurance company pays out the cash values with the death benefit because they are inclusive of each other. This is why loans from the cash value are not taxable as long as the policy is in force (because death benefits are not taxable).