Whole life insurance: what is guaranteed, what the cash value really does, and what to ask

What is guaranteed in a whole life policy

Three things are written into the contract: the death benefit, the premium schedule, and a table of guaranteed cash values by policy year. The Maryland Insurance Administration’s guide tells you to read that table to know your cash value, and to call the company if you are still not sure. The NAIC adds that state law requires whole life policies to include nonforfeiture values, benefits that must be paid in cash or as other insurance if the policy ends because you stopped paying or surrendered it.

Everything else, including dividends and any projected values above the guaranteed table, is not guaranteed. The Maryland guide states that promises of a “paid-up” policy based on non-guaranteed values are illegal in Maryland.

How cash value builds, and who gets it

Part of each premium pays for the insurance and the company’s expenses; the rest builds cash value that grows tax-deferred inside the policy. Values are low in the early years and build later, the NAIC notes, which is why quitting early is expensive. The Maryland guide’s example: a person who paid $1,000 a year for ten years and cashed in the policy received $5,800, because the rest had paid for insurance.

The cash value is yours while you are alive. When you die, the Maryland guide is clear, your beneficiaries collect the stated death benefit, not the death benefit plus the cash value, unless the policy specifically pays both. Any unpaid loan and its interest are subtracted from what they receive.

Policy loans: borrowing from your own coverage

You can borrow against the cash value, usually without a credit check, and repay on your own schedule. The loan charges interest, and if it is not repaid, the balance and the interest come out of the death benefit; the Maryland guide warns your beneficiary could end up with less than the face amount. A large enough loan can also drain the values that keep the policy in force.

Ask how loan interest is set, whether unpaid interest is added to the loan, and what happens to the policy if the loan grows past the cash value.

“Paid up” and dividends: two promises to check

“Fully paid up” means you have paid enough premiums to cover the cost of insurance for the rest of your life. The Maryland guide explains that some policies are sold as paying themselves up after a number of years using dividends or interest; those elements usually have to earn far more than the guaranteed amounts, and if they do not, the bills keep coming. If you have a written promise of a paid-up policy, the Maryland Insurance Administration may be able to help.

A dividend on a participating policy is a refund of part of your premium, paid when the company collects more than it needs. The NAIC notes dividends can be used to lower premiums or buy more coverage. They are possible, not promised, so ask to see the guaranteed column of any illustration without dividends.

Whole life versus term: the honest comparison

Whole life costs more because it does more: it lasts your whole life and builds a cash value. Term costs less because it covers a set number of years and builds nothing. The Maryland guide’s “buy term and invest the difference” discussion lists the tradeoffs both ways: term premiums rise as you age, you may not be able to buy new coverage if your health changes, and a permanent policy may fit better for some needs.

Whole life tends to be considered for needs that never end, such as final expenses or a legacy, or by people who value fixed premiums and guaranteed values. The comparison guide on this site puts the structures side by side on the same need; this page does not recommend one.

Questions to ask before you apply

Take these to Paola or any licensed producer and ask for the answers in writing, with the guaranteed values table from the actual policy. Health details, your date of birth, and payment information go only in the carrier’s application.

The Maryland Insurance Administration’s advice on early cancellation applies most strongly here: avoid buying a permanent policy unless you intend to keep it, because quitting in the early years can be very costly.

• What is the guaranteed cash value in years 5, 10, and 20, without dividends?
• Is the premium level for life, or does it change?
• How do loans affect the death benefit and the policy’s ability to stay in force?
• If I stop paying, which nonforfeiture options does the contract give me?
• What are the surrender charges in the early years?