In participating whole life, death benefits and cash values
are guaranteed, and the resulting profits are distributed among the policyholders as dividends.
If the plan is to use policy cash values
for living needs, the policyowner will want to avoid MEC status.
Unlike many other products, participating whole life insurance offers three important guarantees: a guaranteed, level premium that will not increase for the life of the contract; guaranteed cash values
and nonguaranteed dividends that accumulate on a tax-deferred basis and can be accessed through loans throughout the policyholder's lifetime; and a guaranteed death benefit to beneficiaries, which is usually income tax-free.
Finally, withdrawals may also be used to access cash values
While term insurance can provide a lot of protection for a lesser cost, it builds no cash values
and has no permanent values.
Whole life cash values
have been one of the best performing asset categories for the last ten years and that will continue.
To identify plan abuses, the IRS is looking at the use of "springing cash values
," which occurs when a plan makes large initial payments on its insurance contracts, then the plan is terminated and the contracts transferred to plan participants.
Based on this narrow view it's no wonder so many CPAs fall into the trap of agreeing to allow unneeded policies to lapse or be surrendered for just their cash values
If you must buy a cash-value policy, universal life is cheaper than whole life and builds cash values
All capital gains and losses from those funds pass through to the policy's cash values