Whole Life Insurance: Money-Back Guarantees And Peace Of Mind

Whole life insurance is a type of permanent life insurance that combines an insurance product with an investment account called cash value. This cash value can be withdrawn while the policyholder is still alive. Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed a death benefit when they die. Whole life insurance offers lifelong coverage and has a guaranteed minimum rate of return on the cash value. The cash value in a whole life insurance policy grows at a fixed rate set by the insurer, typically between 1% to 3.5%. This sets whole life insurance apart from other permanent policies, which don't guarantee returns.

Surrendering your policy: Cancelling your life insurance policy and receiving the cash value, minus any fees

Cancelling your life insurance policy and receiving the cash value is known as "surrendering" your policy. This is different from "cashing out" your policy, which involves withdrawing or borrowing cash from your policy without cancelling it. Surrendering your policy will result in you receiving the cash value of your policy, minus any fees.

The cash surrender value of a life insurance plan is the amount you will receive if you surrender your policy to your insurer. This amount is based on your cash value, which is the component of a permanent life insurance policy that helps you build cash value through regular premium payments. Your policy's cash surrender value will depend on its duration, growth, and assets. Surrendering your policy earlier in the term may result in a lower cash surrender value since the cash value will be smaller, and you may owe surrender charges. Surrender charges can be significant, especially for newer policies. If you surrender your policy later, you will receive a larger payout since the cash value will be larger, and you will pay fewer fees. Surrender fees typically disappear after 10 to 15 years.

The cash surrender value you receive on a life insurance policy is usually handed over tax-free, as long as it doesn't include any proceeds that are more than the cost of the life insurance policy. However, if you receive more in surrender value than the sum of premiums you paid into the policy, you may owe taxes on the difference.

To surrender your policy and receive the cash surrender value, you will need to review your life insurance policy documents, speak with your insurer, fill out the necessary paperwork, and then receive the cash surrender value. It is recommended that you consult with a tax expert and financial advisor, as receiving a large payout could trigger tax consequences.

Before surrendering your life insurance policy, consider the following:

• The cash surrender value
• The cost of getting another life insurance policy
• Future financial goals

There are also alternatives to surrendering your policy to access your cash value. These include:

• Borrowing from your cash value
• Withdrawing from your cash value
• Using your cash value to pay premiums

Withdrawing from your policy: Taking a cash withdrawal from your permanent life policy, often tax-free if it's not more than the amount paid into the policy

Withdrawing from your permanent life insurance policy is a way to access the cash value that has been built up over time. This can be a useful source of cash, but it is important to understand the potential disadvantages and tax implications.

Firstly, it is important to note that not all permanent life insurance policies will allow you to withdraw from your cash value. Whole life and universal life policies may offer this option, but it is important to check the specific terms of your policy. If withdrawals are allowed, they are typically tax-free as long as the amount withdrawn is not more than the amount paid into the policy. This is because you have already paid income tax on these premiums, so they will not be taxed again when withdrawn.

However, there are a few potential disadvantages to consider. Withdrawing cash from your permanent life insurance policy will likely result in a reduction in your death benefit, and this reduction may be greater than the amount withdrawn. It is important to speak to your insurance agent or company to understand how withdrawing money will affect your specific policy. Additionally, if you withdraw more than the amount you have paid into the policy, the excess amount will be subject to income tax.

Another option for accessing the cash value in your permanent life insurance policy is to take out a loan from the insurer, using your policy as collateral. This option typically does not require a loan application or credit check, and the interest rates are often lower than those for personal loans or home equity loans. You may choose not to repay the loan, but the outstanding balance will typically be deducted from your death benefit.

Borrowing from your policy: Borrowing money against your policy, which usually has a lower interest rate than a personal loan

Borrowing from your whole life insurance policy can be a quick and easy way to get cash in hand when you need it. However, it is important to understand the specifics before borrowing.

Borrowing from your policy

Firstly, it is important to note that you can only borrow against a permanent life insurance policy, which includes whole life insurance or universal life insurance. Term life insurance, which is cheaper and more suitable for many people, does not have a cash value and is designed to last for a limited period, generally anywhere from one to 30 years.

If you have a permanent life insurance policy, you can borrow against the net cash surrender value, which is the portion of your policy that builds up over time. It can take several years for the cash value to accumulate enough for borrowing.

Interest rates and repayment

The interest rates on policy loans are typically lower than on bank loans or credit cards. According to November 2022 data from the Federal Reserve, the average rate on a two-year personal loan is 11.23%, while the average interest rate for a credit card is 20.40%.

There is no set repayment schedule for policy loans, and you can repay the loan on your own schedule. However, it is important to pay the loan back in a timely manner, in addition to your regular premium payments, to avoid accruing interest and reducing your death benefit.

Benefits and drawbacks

One of the main benefits of borrowing from your life insurance policy is that it offers quick cash with no questions asked, no application process, and no impact on your credit score. Additionally, the loan is not recognised by the IRS as income, so it remains tax-free as long as the policy stays active.

However, there are also several drawbacks to consider. Borrowing from your policy reduces the death benefit for your beneficiaries, and if the loan and interest exceed the policy's cash value, it could cause the policy to lapse. There may also be tax consequences if your policy lapses before the loan is fully repaid.

Alternative options

Before borrowing from your life insurance policy, consider alternative options such as personal savings or low-interest personal loans, which do not put your life insurance policy or your beneficiaries' financial security at risk. Consult a financial professional to determine the best option for your situation.

Using cash value to pay premiums: Using the money in your cash value to pay your policy premiums

Whole life insurance is a type of permanent life insurance that lasts your entire life and offers a cash value component. This cash value component grows over time and can be used to pay your policy premiums.

When you pay your premium, a portion of it goes towards the cost of insurance, while the remainder is deposited into a cash value account. This cash value account grows tax-free, and you can borrow against it or withdraw from it.

Using the cash value in your whole life insurance policy to pay your premiums can be a good option if you're retired and need to reduce your monthly expenses but want to keep your policy in place. However, it's important to note that any amount taken from your cash value account and not repaid before your death will reduce the death benefit paid to your beneficiary.

Additionally, it's crucial to understand the rules and requirements of accessing your cash value. Speak to your insurance agent to find out the specific details of your policy.

Whole vs universal life insurance: Understanding the differences between the two types of permanent life insurance and how they affect your cash value

Whole life insurance and universal life insurance are both types of permanent life insurance, but they have some key differences.

Whole Life Insurance

Whole life insurance offers lifelong coverage, with fixed premium payments and a fixed death benefit. A portion of each premium payment goes into a cash value account, which grows at a fixed rate (e.g. 2%) and can be accessed during the policyholder's lifetime. Whole life insurance policies also offer the potential to receive life insurance dividends, which can be used to pay premiums, add to the cash value, or be withdrawn as cash. However, whole life insurance premiums tend to be very high compared to other types of life insurance.

Universal Life Insurance

Universal life insurance offers more flexibility than whole life insurance, as policyholders can adjust their premiums and death benefit to fit their changing needs. There are several types of universal life insurance policies, offering different levels of risk and potential for cash value growth. These include guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance. Universal life insurance policies may also offer a cash value component, but this is not guaranteed and can fluctuate over time.

How They Affect Your Cash Value

Whole life insurance offers a guaranteed cash value, which grows at a fixed rate. Universal life insurance policies may also build cash value, but this is not guaranteed and can depend on factors such as how the policy is funded and the insurance company's investment choices. Whole life insurance tends to be more expensive than universal life insurance, as the premium payments, death benefit, and growth rate of cash value are all guaranteed to remain fixed.

Frequently asked questions