Maximizing Your Cash Value Life Insurance Benefits

Cash value life insurance is a form of permanent life insurance that lasts for the lifetime of the holder and features a cash value savings component. The cash value of life insurance earns interest, and taxes are deferred on the accumulated earnings. The cash value component serves as a living benefit for policyholders, from which they may access funds in several ways. However, the cash value is typically not paid to beneficiaries and is instead kept by the insurer.

Whole Life Insurance

The cash value of a whole life insurance policy can be a useful feature for policyholders. It can be used to pay for significant expenses, such as a down payment on a home, college tuition, or retirement costs. It can also provide financial security, supplement retirement income, or be used to make large purchases. Additionally, the cash value allows policyholders to borrow against their policy, providing funds for emergencies or other needs.

However, it is important to note that withdrawals and outstanding loan balances will reduce the death benefits. Whole life insurance policies are also generally more expensive than term life insurance policies due to the accumulation of cash value and the lifelong coverage they provide.

When considering a whole life insurance policy, it is essential to compare quotes and policies to ensure you are getting the most suitable coverage for yourself and your family.

Universal Life Insurance

• Flexible Death Benefit: Universal life insurance allows you to choose the amount of your death benefit and, in some cases, change it over time to fit your needs.
• Flexible Premiums: You can raise or lower your premium payments within certain limits, making it easier to manage your policy if your earnings vary. However, it's important to monitor your cash value, as underpaying for too long can affect your death benefit or cause your policy to lapse.
• Cash Value: Universal life insurance has a built-in cash value component that grows over time and earns interest. You can borrow against or withdraw from the cash value for various purposes, such as emergencies, investments, or supplementing retirement income.
• Tax Advantages: The cash value growth and death benefit are typically tax-deferred, and there are no immediate tax implications for borrowing against the cash value. However, withdrawals above a certain amount may be taxed.
• Customizable Coverage: Universal life insurance allows you to choose how much coverage you need and when you pay your premiums, making it adaptable to your life and financial situation.

Compared to whole life insurance, universal life insurance offers more flexibility but fewer guarantees. Whole life insurance has fixed premiums, a guaranteed death benefit, and guaranteed cash value growth, while universal life insurance allows for adjustable premiums and death benefits but offers less certainty.

Variable Life Insurance

You can also allocate money toward a fixed account to receive a fixed rate of interest and reduce overall risk. This rate may change annually, but there is typically a guaranteed minimum, such as 3%. Variable life insurance can provide you with an opportunity to make money in the market that has tax advantages. The investment portion receives favorable tax treatment, as the growth isn't taxable as ordinary income. So, you can draw from these accounts in later years, namely through loans using the account as collateral instead of making direct withdrawals, and receive tax-free income.

Indexed Life Insurance

Indexed universal life insurance is a type of permanent life insurance that provides a death benefit alongside a cash value component. The cash value in a policyholder's account can earn interest by tracking a stock market index selected by the insurer, such as the Nasdaq-100 or the Standard & Poor's 500. This is in contrast to other universal policies that only grow cash value through non-equity earned rates.

Indexed universal life insurance policies are more volatile than fixed universal life policies but are less risky than variable universal life insurance policies because they do not invest directly in equity positions. The interest rate derived from the equity index account can fluctuate, but the policy does offer an interest rate guarantee, which limits losses. It may also cap your gains, typically around 8-12%.

Policyholders can decide how much cash value to assign to an equity-indexed account and to a fixed-rate account, if available. The gains from the index are credited to the policy based on a percentage rate, known as the participation rate, which is set by the insurance company.

Indexed universal life insurance offers permanent, lifelong coverage when premiums are kept up to date, and it provides flexible premiums and a flexible death benefit. The accumulated cash value can be used to lower or potentially cover premiums without subtracting from the death benefit.

While indexed universal life insurance is a viable option for permanent life insurance with a cash component, it is more expensive than term life insurance. It may be a good choice for those seeking permanent life insurance who also wish to take advantage of possible cash accumulation via an equity index.

Pros and Cons of Cash Value Life Insurance

Cash value life insurance is a permanent life insurance policy that lasts for the lifetime of the holder and features a cash value savings component. The policyholder can use the cash value for several purposes, including borrowing or withdrawing cash from it, or using it to pay policy premiums.

Pros of Cash Value Life Insurance

• Your beneficiaries receive a death benefit.
• Participating life insurance policies have dividends.
• You can add riders for extra coverage.
• Cash value life insurance offers tax advantages.
• Policies earn money that can be withdrawn or borrowed against during your lifetime.
• Policies typically last your lifetime.

Cons of Cash Value Life Insurance

• Cash value life insurance costs more than term life insurance.
• Cash value can take time to build.
• Cash value is not paid to beneficiaries in most cases.
• Your policy could lapse if you borrow too much.
• Taxes may apply.
• Managing policies often requires a hands-on approach.
• Cash value loans have relatively low net interest rates.
• Unpaid loans can reduce the death benefit paid to your beneficiaries.

Frequently asked questions