In participating whole life, death benefits and cash values
are guaranteed, and the resulting profits are distributed among the policyholders as dividends.
The cash values
that are accumulated are put into investments with the intention of earning more in interest.
If the plan is to use policy cash values
for living needs, the policyowner will want to avoid MEC status.
It can provide guaranteed lifetime income that cannot be outlived by using the accumulated cash values
. Even better, this income can be paid income-tax free.
They can also borrow against permanent life insurance cash values
tax-free as long as the policy remains in force.
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.
While term insurance can provide a lot of protection for a lesser cost, it builds no cash values
and has no permanent values.
All other things remaining the same, as the number of payments decreases the annual premium, and consequently, the rate of growth of policy cash values
, becomes correspondingly larger.
The executive, or his/her trust, owns the cash values
from day one."
So, the next step in our analysis is to determine the cash value
for each branch of our tree diagram, since the final cash values
will represent the payoffs for these branches.
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
. This is especially true if the coverage is no longer necessary and the premiums have become burdensome.