When you include a cash value component in your life insurance policy, the entire dynamic shifts. It’s no longer only about protecting your loved ones in the case of your death; it’s also about building and accessing wealth while you’re still living. Which products, however, provide cash value life insurance? That’s what this helpful guide to all things cash value is here to tell you.
What is cash value life insurance, and how does it work?
With cash-value life insurance, you can use your policy to accumulate wealth. When you purchase coverage, you basically pay into two pots each month for the premium: the death benefit and the cash value.
The death benefit money grows the amount you leave to your beneficiary after you die, while the cash value rises and is accessible while you’re still living.
Permanent life insurance policies with a cash value include the following:
- Whole life insurance
- Universal life insurance
- Variable universal life insurance
- Indexed universal life insurance
- Guaranteed issue life insurance
The cash value component is distinct from the death benefit, which means that whatever is left in your insurance when you die reverts to the insurer. The way your money grows is determined by the sort of policy you choose. Term life insurance is the only policy that does not give a monetary value.
Plans and possibilities for life insurance with a cash value
1) Insurance for the rest of your life
You get a fixed monthly payment and a guaranteed death payout with whole life insurance. The premium payments are fixed, so you pay the same amount every month for the rest of your life. Over time, the cash value grows at a guaranteed minimum pace. Every year, you can combine your corporate dividends (if you receive them) with the cash worth of your whole life insurance to build up the account faster.
2) Life insurance that is available to everyone
Universal life insurance is more flexible than whole life insurance, with a variety of options that allow you to change the death benefit and lower premiums as needed–as long as the cash value is sufficient to support the policy’s costs.
You can choose between indexed universal life insurance (IUL) and variable universal life insurance as part of universal life insurance (VUL). IUL allows you to link the cash value to an index like the S&P 500, whereas VUL allows you to link it to sub-accounts with various investment types.
Guaranteed issue life insurance
Guaranteed life insurance is a type of whole life insurance that is available in minimal coverage amounts, such as $20,000. Some guaranteed life insurance policies have a cash value component, but because the amount is so tiny in comparison, the opportunity to accumulate wealth is lower than with other options.
Guaranteed issue life insurance cannot be denied, but if you die within a few years of purchasing the policy, your beneficiaries will not receive the full payout.
How do you get your hands on the money?
The cash value component of permanent life insurance can be accessed in one of two ways: directly withdrawing the money or taking out a loan against it. You can also retrieve the cash value you’ve put up minus the penalty if you decide to cancel the policy. This is termed a surrender charge, and it is imposed if you terminate your coverage during the first few years of acquiring it.
Taking out a loan on your insurance policy
Taking out a loan against your policy is one of the most common ways to withdraw the cash value, especially since this approach is tax-free. The death benefit is used to repay the loan amount outstanding when you pass away. However, because the death benefit has grown over time, there should still be enough for your beneficiary–especially if you’ve owned the policy for a long period. Your credit report will not show that you used a loan to cover your cash value.
Take out the cash value.
There’s also the option of taking the money out of your policy directly.
Just keep in mind that there may be negatives to this method of obtaining funds, as it may contain taxable investment gains (referred to as “above base”). Making a direct withdrawal, like taking out a loan, has an impact on the amount of life insurance left for the death benefit.
Give up the policy.
If you surrender your policy, you’ve canceled your coverage and may be charged a surrender fee. You will get any cash value in the policy less any unpaid premiums, outstanding loan balance, and potential surrender charge after you cancel.
Policies that encourage participation
Whole life insurance policies are frequently classified as “participating.” If a policy is purchased through a mutual insurance firm, the policy owner can get dividends.
A mutual insurance firm has no shareholders and is owned entirely by its policyholders. This means the insurer produces more money than is required to run the business and distributes a portion of it to the policyholder in the form of a dividend.
Dividends can be taken as cash, added to your cash value, or used to pay premiums. They can also be used to purchase “paid-up additions” to your life insurance policy, which boost the amount of money left to your beneficiaries in the event of your death.
In essence, having a participating coverage decreases your overall life insurance expenses.
Riders to be added
Riders are an important part of permanent life insurance policies because they allow you to customize your coverage. An accelerated death benefit, a guaranteed insurability rider, and other options are popular riders.
Benefits for a faster death
You can use an accelerated death benefit rider to get your death benefit before you die. As a result, if you get extremely ill or are unable to work due to an injury, you can claim the death benefit because you won’t be able to earn a regular income from your job. Even if you’re unable to work, and expedited death benefit rider can help you maintain a steady income.
The rider with guaranteed insurability
Adding a guaranteed insurability rider to your policy allows you to acquire more coverage without having to undergo any additional medical exams. If your circumstances change, such as having a child, getting married, or increasing your income, this rider can come in useful. You can also apply for additional coverage with a guaranteed insurability rider without having to present proof of insurability.