Charitable Giving and Life Insurance Part 3, Whole Life

Lady working on a whole life policy
Financial Planning

Charitable Giving and Life Insurance Part 3, Whole Life

We are going to spend some time on life insurance, and whole life in this example. As you may have seen, we already have. I’m taking the time to help you understand the power it can have because it can help you make an impact on missions. I’m also taking the time because it’s important to understand how it works. For this article I am going to describe a made up policy. I am using made up numbers. Why would I do this? So we focus on the concepts and avoid getting into the weeds over numbers. The time to get into the weeds over the numbers is when you are actually looking to establish a policy. Let’s dive in.

Meet Sam

We will stop in here and meet Sam. Sam is 47 years old. He is married to Sue and they have three children, Bobby, Barbie and Kenny. Sam works in IT security. He has been tasked with developing systems to prevent AI applications from breeching embedded systems in the payment service and banking industry. Talk about job security. Sam decided to go with a whole life policy instead of an indexed universal life policy. He liked that there were more guarantees and less moving parts than an IUL. Is an IUL a bad idea? No. It is about what you want to accomplish. But let’s talk about some of those guarantees.

The base rate is a rate guaranteed from year to year. They stay fairly steady, typically anywhere from 2-6%. In addition, you can use paid up additions and dividends to help build the cash value. These are not guaranteed. Dividends are based on the profitability of the insurance carrier. Also, you can use term riders to reduce costs and help build the cash value. In a whole life policy you are guaranteed to never lose what you have earned and it is tax deferred and can be tax free. Keep in mind, this is whole life, it has the most guarantees, but there are insurance costs involved. This chart is loosely based on a case I’m working on. The person is in their sixties and wanted to do something with a million dollars and specifically asked about using life insurance. I have rounded down and rounded up to make nice round numbers.

This chart is purely fictional. The numbers are not accurate. This chart is only for educational purposes to demonstrate the concept.


As you can see, after 10 years, there is $1,300,000.00 in cash value available. Nothing to get excited about. At this point, they’ve put in $1,125,000.00 and that is all they will ever need to put in but the cash value continues to grow. After 20 years, there is now $2,100,000.00 but they only put in $1,125,000.00. This is all guaranteed except the dividends. This particular carrier is very good about being very close to the illustrated values. The dividends fluctuate so the value will not be exactly as illustrated. But as mentioned, this carrier stays pretty close to illustrated values. Other carriers do well too but this chart is based on this carrier. Sorry, but I cannot say the carrier because of licensing and this is not an accurate representation of their product. Again this is only for educational purposes.

What can you do with the cash value?

The cash value in the policy can be used for whatever purpose Sam desires. There are basically a couple of options to access the cash value. You can do a full or partial surrender. In that case, there may be surrender fees, possibly taxes, a reduction in account value and diminished growth. The other option is to take the value out as a loan. Typical interest rates are 3-5%. It can be more, it can be less. Many may be thinking, “But that’s Sam’s money. Why does he have to pay interest?” Actually it’s not his money. His money is the collateral for the loan and stays in the policy and continues to help it grow. It is his choice as to whether or not he pays it back. If he decides not to pay it back then the death benefit is reduced by the amount of the loan(s) outstanding plus any applicable interest.

One very important point to keep in mind. If he takes it out as a loan there are no surrender fees and no taxes. If he takes a full or partial surrender, there will be taxes and surrender fees depending on the age of the policy.

But how would all this apply?

As an example, let’s say I decide to give $25,000 to missions. One option is that I could take it out of my brokerage account. Then my account is reduced by $25,000 plus any fees and capital gains taxes. So more than $25,000. The same basic scenario for bonds, stocks, CDs or basically anything else. But if I take it out of my policy as a loan my money stays in the policy and there are no taxes. Taxes versus no taxes. Yes, there is interest on the loan. Average is often around 5%. So a 5% loan vs. 15% capital gains and fees. That’s a 10% positive difference. Think about that. I realize this is a very over simplified explanation. There are details from carrier to carrier that can make a world of difference. It is important to sit down with someone you know and trust and has a demonstrated competency in this area.

Please note: All charts and numbers are for illustration purposes only. Accuracy is neither warrantied nor implied. We are not attorneys or tax advisors. This information is educational only. Not to be considered as advice or recommendations. It is imperative that you consult with a tax advisor and/or attorney when considering any of these concepts. In addition, it is critical that the attorney, tax advisor, and financial advisor are knowledgeable and practiced in these areas.

If you would like help finding such an advisor, we will be glad to introduce you to an experienced planner with your best interest in mind. Please give us a call at 1-800-522-4324.

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Read previous articles on the art of Chartiable Giving


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