The contract is made up of a guaranteed death benefit, guaranteed cash value and guaranteed premium. The most cost efficient whole life contracts have also provided a dividend which may be used to enhance contract values or reduce premium on an annual basis. While dividends in these contracts are not guaranteed they have historically been paid for the last hundred years or so with no interruption. Cash value increases are not taxable until drawn and then are taxable only to the extent they exceed the client's basis in the contract. Cash values in the contract are available to the owner on a loan basis usually at a variable loan rate determined by a formula based on the latest 12 month T-Bill yields.
Interest is paid annually at policy anniversary.
Unlike most forms of indebtedness, insurance policy loans do not require a repayment of the principal. The death benefit is fully guaranteed for the life of the insured. Specifically, the insured who pays the premium on a timely basis can be sure that the death benefit will never be less than the initial death benefit in the contract. This safety is a result of higher premium expense in the early years. In future years, as the likelihood of death increases, the mortality costs increase rapidly.