What You Need To Know About Cash Value Life Insurance

What You Need To Know About Cash Value Life Insurance

Cash value life insurance, also known as universal life or whole life insurance, is a form of life insurance that builds cash value. You can use this cash value for a number of different options including pay premiums due, withdraw a portion of the cash to use as retirement income, or surrender the entire policy and move the cash to some other investment.

Unlike term life insurance, cash value style policies do not have an expiration date. This means they can remain in force for your entire life. But some cash value products do have a maturity date that might require you to accept the cash value built up in the policy and cancel your death benefit.

How Do Cash Value Life Insurance Policies Work?

Cash value life insurance requires a premium for a death benefit chosen by the policy owner. Paying this premium also causes the policy to build cash value. Once the policy accumulates cash value, the policy owner can choose to access the cash value through an array of options. This might include exercising a nonforfeiture benefit offered by the life insurance contract. Alternatively, it could be taking some of the money out of the policy through a withdrawal or policy loan.

Using the cash value in a policy comes with a few caveats. Cash value policyholders can withdraw funds from their plans without being subject to the limits or taxable penalties that many retirement investment accounts impose. Furthermore, cash value policies provide a slew of tax advantages that entice many insurance consumers to purchase the product.

What Kind Of Fees Does Cash Value Life Insurance Have?

Some people criticize these types of life insurance for their fees. Cash value life insurance policies definitely have fees and some policies have considerable fees.

These costs are clearly stated in a special report that comes with the life insurance illustration for some policies. However, the costs of other things are extremely difficult to establish. This, predictably, results in criticism and cautions concerning cash value-style items.

Universal life insurance products will provide a detailed breakdown of policy expenses. This report accompanies the life insurance illustration. This report shows us the annual charges assessed against the policy in the column titled “Policy Charges.” This report also details the loan interest charged if a policy loan is outstanding (see years 29 and 30).

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Whole life insurance, on the other hand, does not disclose policy cost information. Whole life insurance is sometimes referred to as the “Black Box” for this reason. The product operates in relative secrecy and never discloses the actual fees deducted from the policy by the insurance company.

Types Of Policies

Life insurance options for cash value-style products come in two basic forms; whole life insurance and universal life insurance. Both types of life insurance operate under the same basic principles of any life insurance policy. They both offer life insurance coverage, have a premium payment you must make for a certain length of time, and they will both pay death benefit proceeds to your named beneficiary upon death.

Additionally, both policy types provide a cash value account and they are both considered permanent life insurance policies, which will last for your entire lifetime.

A whole life insurance policy will provide a number of guarantees. Guaranteed premiums, guaranteed death benefits, and guaranteed accumulated cash value are examples of these. In exchange for these guarantees, a whole life policy will often have a substantially higher premium payment. Because whole life policies do not have surrender charges, your policy’s cash value will also be its cash surrender value.

Whole life insurance policies are typically sold by mutual insurance firms. These are insurance firms that are owned by their customers. The financial obligations of mutual insurers are to these policyholders. Universal life insurance foregoes the majority of the guarantees provided by whole life insurance in order to include more potential non-guaranteed features. A universal life policy also provides a great deal of flexibility in terms of policy premiums. Surrender charges are a regular aspect of universal life insurance, therefore the cash value of the policy is not always the actual surrender value.

There are several different types of universal life policies. They include variable universal life insurance, indexed universal life, and “current assumption” universal life. Variable life insurance puts the policy’s cash value in an investment account where it rises and falls with the performance of the investment. Indexed UL insurance pays an interest rate that tracks a stock market index. Current assumption products set an annual interest rate payable on the policy’s cash value.

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How Do You Access The Cash Value?

The cash accumulation element of a cash value insurance policy is its main selling point. This sort of life insurance is frequently used as a savings account by many people. The appeal is the significantly greater effective interest rate on their deposits compared to a regular money market or savings account. The cash in these insurance increases at a pace similar to bonds, but with significantly greater liquidity. The method of accessing the cash value in these policies varies depending on the type of cash value life insurance you buy.

The monetary value can be accessed by partial withdrawals or a loan. Whole life plans only enable partial withdrawals of non-guaranteed cash values, whereas UL policies allow partial withdrawals of all policy values. Loans work the same way for both types of life insurance. Both accrue interest, which you have the option of paying out of pocket or adding to the outstanding loan total. Loans have particular tax benefits that keep them from generating an income tax liability—this is true for both product categories.

You can also use your whole life insurance cash value for the three nonforfeiture benefits: extended term insurance, reduce paid-up, or surrender for cash value. Universal life policies allow only the surrender for cash value nonforfeiture benefit.

What Insurance Companies Issue These Types Of Policies?

Mutual insurance companies often issue whole life policies. But whole life can also come from other forms of insurance companies. Additionally, fraternal companies often issue whole life policies. Fraternal are not technically insurance companies, but they operate under very similar protocols.

Universal life insurance policies are available from a considerably broader range of life insurance providers. Some mutuals do offer UL policies, but this form of cash value policy is most commonly found with a stock life insurance company. It is critical to recognize that not all life insurers offer all types of life insurance policies. While some companies may issue one or the other, you should not expect them to provide both.

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Do I Have To Buy From An Agent?

If you are seeking a cash value policy, you will have to buy from an agent/broker. While you can buy a term life insurance policy from a number of different places that don’t use insurance agents, cash value policies are different.

The complexity of these policies makes it very difficult to offer them in an automated fashion as some companies do with a term life policy. The insurance premiums you pay for the policy’s death benefit can vary greatly depending on several factors. This includes various policy features and any chosen rider.

In addition, cash value policies can create a tax penalty situation due to the Modified Endowment Contract (MEC) limitations imposed on them by the IRS. Having a knowledgeable life insurance agent available to help guide you through this could save you from a significant hassle.

Will I Earn Dividends?

If you buy whole life insurance you might earn a dividend. Life insurers do not guarantee the payment of dividends, and you’ll have to ensure that your whole life policy is “participating” in order to earn them.

Dividends are not paid on UL policies. Instead, they pay interest, which can vary from year to year. Alternatively, in the case of variable life insurance, the cash value will fluctuate depending on the value of the investments employed in the policy.

What Sort Of Rate Of Return Will I Get?

Several things will influence your rate of return on a cash value policy. The main factors influencing the rate of return are the life insurance premiums you pay in relation to the death benefit of the policy. In most states, your gender may play a minor influence; women tend to obtain a slightly higher return at the same age since they have moderately lower insurance premiums. The return on these life insurance policies will correspond to the return on the portfolios managed at the life insurance firm, also known as the General Account. Over your lifetime, you should expect an annualized return of 4 to 4.5%.

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