Does Your Life Insurance Cash Value Increase?

Life insurance is a way to protect your loved ones from financial strain in the event of your death. Permanent life insurance policies such as whole life, universal life, and variable universal life can also accumulate cash value over time. This cash value can be used to pay for other life expenses, such as a child's education, a down payment on a home, or a financial emergency. The cash value typically accumulates because your premiums are split into three categories: one portion goes toward the death benefit, another toward the insurer's costs and profits, and the third contributes to the policy's cash value. This cash value can increase over time as you continue to pay premiums and earn interest, but it's important to note that the funds allocated to cash decrease as you age, while the funds paid to insurance increase. Understanding how your specific policy accumulates cash value and how you can access it is crucial for making the most of your life insurance.

Borrowing against life insurance

If you have a permanent life insurance policy, you may be able to borrow against it by using the cash value as collateral. This is not possible with term life insurance, which does not have a cash value component.

The cash value of a life insurance policy is a portion of your premium payments that accumulates over time. It is intended to be a tool to help protect your loved ones from financial strain in the event of your death. You can also access this cash value before your policy ends, for instance, by taking out a loan.

The pros of borrowing against life insurance include:

• No formal approval process
• No impact on your credit score
• Quick access to cash
• Flexible repayment schedule

The cons of borrowing against life insurance include:

• Risk of losing your life insurance plan if you are unable to make monthly loan payments
• Reduced death benefit for beneficiaries if the loan is not paid back before the policy owner passes away
• Possible tax liabilities if the policy lapses

If you are considering borrowing against your life insurance, it is important to understand the risks involved and consult with a financial advisor to make sure it is the right decision for your situation.

The amount of money you can borrow against your life insurance policy depends on the cash value you have accumulated and the rules set by your insurer. Typically, you can borrow up to 90% of the policy's cash value.

You can borrow against your life insurance policy as soon as there is enough cash value built up to cover your desired loan amount. This can take several years, depending on the structure of your policy.

Withdrawing from life insurance

Types of Life Insurance Policies

It is important to understand the different types of life insurance policies as not all policies allow withdrawals. The two main types of life insurance are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, often 10 to 30 years, and only offers a death benefit with no cash value component. On the other hand, permanent life insurance provides coverage for your entire life and includes both a death benefit and a cash value feature. Within permanent life insurance, there are two primary types: whole life insurance and universal life insurance. Whole life insurance offers guaranteed premiums and death benefits, along with a guaranteed rate of cash value growth. Universal life insurance provides more flexibility, allowing adjustments to premiums but with fewer guarantees.

Accessing Cash Value

The cash value in a permanent life insurance policy can be accessed in several ways:

• Withdrawal: You can typically withdraw a portion of the cash value, similar to a bank account. Withdrawals are generally tax-free if they do not exceed the amount you have paid into the policy. However, withdrawals may reduce the death benefit for your beneficiaries.
• Surrender: You can cancel your policy and receive the surrender value in cash. This option should be a last resort as it terminates your life insurance coverage. Surrender fees can be significant, especially for newer policies, and you may also owe taxes on the amount received.
• Loan: You can borrow money from the insurer, using your policy as collateral. Life insurance loans usually have lower interest rates compared to personal loans and do not require credit checks. While repayment is optional, any outstanding loan balance will typically be deducted from the death benefit.
• Premium Payment: You can use the cash value to pay your life insurance premiums, helping to maintain coverage when you are strapped for cash.

Considerations

When considering withdrawing from your life insurance policy, it is important to weigh the pros and cons:

• Withdrawing or borrowing from your life insurance can provide quick access to cash, which can be useful for emergencies or supplemental income.
• Withdrawals are generally tax-free if they do not exceed your total premium payments. However, withdrawals above this amount may be taxed as income.
• Withdrawing money reduces the cash value of your policy and may also decrease the death benefit for your beneficiaries.
• Surrendering your policy cancels your life insurance coverage, leaving your loved ones without protection.
• Life insurance loans accumulate interest, and if the outstanding balance exceeds the cash value, your policy could lapse.
• It usually takes a few years for the cash value to grow to a usable amount.

Alternatives

Before withdrawing from your life insurance policy, consider these alternative options for accessing cash:

• Personal loans: These can provide quick access to cash with lower interest rates than credit cards, especially if you have a good credit score.
• 0% intro APR credit cards: Taking advantage of introductory offers can help you avoid paying interest on borrowed money.
• Home equity loans or lines of credit: Tapping into your home equity can provide large amounts of cash with favourable repayment terms.
• Retirement accounts: Depending on your age, you may be able to start withdrawals from retirement accounts such as a 401(k).
• Non-retirement investment accounts: Selling assets from taxable accounts can provide cash, and you may benefit from favourable long-term capital gains tax rates if you've held the assets for over a year.

In conclusion, withdrawing from life insurance can provide financial flexibility, but it is important to carefully consider the potential impacts on your coverage, tax implications, and alternative options for accessing cash. Consult with a financial professional to fully understand the consequences of withdrawing from your life insurance policy.

Surrendering life insurance

Surrendering your life insurance policy means cancelling it and receiving a payout from your insurer. This payout is known as the cash surrender value and is the money a policyholder receives for ending their coverage before the policy matures, minus any surrender fees and taxes on earnings.

The cash surrender value is based on the cash value of the policy, which is the total sum in the savings component of permanent policies like whole and universal life insurance. The cash value accumulates over time as a portion of your premium payments is allotted to it. However, the cash surrender value will be lower than the cash value due to surrender fees, which typically range from 10-35%. These fees are usually highest in the early years of the policy and then gradually decrease over time.

There are several reasons why someone might choose to surrender their life insurance policy:

• They no longer need coverage, for example, if their children are grown up and financially independent.
• The insurance premiums have become unaffordable.
• They have found a better policy that offers improved coverage or cheaper premiums.
• They urgently need cash and want to access the cash value of their policy.

It's important to consider the potential drawbacks of surrendering a life insurance policy before making a decision:

• Surrendering a policy can result in high fees and taxes that reduce the cash value of the payout.
• Withdrawing cash value for retirement may result in tax liabilities.
• Surrendering a policy means losing the death benefit protection, which could leave loved ones financially vulnerable.

If you're considering surrendering your life insurance policy, it's recommended to consult a financial advisor to ensure you're making an informed decision that aligns with your unique financial goals. Additionally, selling a policy through a life settlement company can often result in a higher payout than surrendering it.

Using cash value to pay premiums

Using the cash value of your life insurance policy to pay premiums can be a good strategy if you have a fairly large cash value with consistent returns. However, this approach only works for a short period if you start when the cash value is small or if interest rates are low.

Variable and universal life insurance policies are often favoured for this strategy because they allow you to use the policy's cash value to pay premiums. Whole life insurance policies, on the other hand, typically don't let you pay premiums using the policy's cash value, except if you convert to a paid-up policy. Not all insurers offer this option, but with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket.

Here's an example to illustrate how this strategy works: let's say your annual premium is $5,000 and you have $100,000 in cash value. You would only need the policy's cash value to net 2.5% interest annually to cut your premium payments in half while maintaining the full cash value.

It's important to carefully monitor the cash value to ensure it doesn't drop too far, or you may lose your coverage. Additionally, by using the cash value to pay premiums, you will have less cash value available for other purposes, such as a policy loan.

Keep in mind that the older you are, the more likely it is that the cost of your premiums will outweigh any eventual benefit. Therefore, using the cash value to pay premiums may not be a sustainable long-term strategy, especially as you age and the cost of insurance increases.

Selling life insurance

• Understanding the Product: It is essential to have a comprehensive knowledge of the life insurance products you are offering. Life insurance can be a complicated financial product, and customers will rely on your expertise to make an informed decision. Make sure you understand the different types of life insurance available, such as term life insurance, whole life insurance, universal life insurance, and variable life insurance. Each type has its own unique features, benefits, and drawbacks, so be prepared to explain these to potential customers.
• Identifying the Needs of the Customer: Effective selling is about solving the customer's problems. Take the time to understand their unique situation, financial goals, and concerns. Ask questions to determine their needs, such as whether they are looking for short-term or lifelong coverage, if they want a policy with a cash value component, and what their budget constraints are. By understanding their needs, you can tailor your recommendations accordingly.
• Highlighting the Benefits: Life insurance can be a challenging product to sell, as it involves discussing sensitive topics such as mortality and financial security. Emphasize the benefits of life insurance to the customer and their loved ones. Explain how it can provide financial protection and peace of mind in the event of their passing. Highlight the flexibility that certain policies offer, such as the ability to borrow against the policy or withdraw funds for emergencies.
• Addressing Objections: Be prepared to address common objections that potential customers may have. For example, some people may believe that life insurance is too expensive or not a priority for them. Listen to their concerns and provide thoughtful responses. You can explain the long-term benefits of investing in life insurance and how it can be tailored to their budget. Offer comparisons between different policies to illustrate the value and affordability of the product.
• Building Relationships: Selling life insurance is often about building trust and long-term relationships with customers. Focus on creating a positive and consultative sales experience. Be transparent and honest in your interactions, ensuring that customers understand the terms and conditions of the policy. By establishing yourself as a trusted advisor, customers are more likely to feel confident in their purchase and refer you to others.
• Utilizing Sales Techniques: There are various sales techniques that can be effective in selling life insurance. For example, storytelling can be a powerful tool to help customers relate to the product. Share success stories or personal experiences that demonstrate the value of life insurance. Additionally, use active listening and ask open-ended questions to better understand the customer's needs and address their concerns effectively.
• Following Up: Don't underestimate the power of following up with potential customers. Many sales may not happen on the first interaction, so stay in touch and provide additional information or answers to their questions. Following up also allows you to build a relationship and demonstrate your commitment to their financial well-being.

Remember that selling life insurance is about finding the right fit for the customer and ensuring they understand the value and benefits of the policy. By combining product knowledge, empathy, and effective sales techniques, you can successfully sell life insurance and help customers secure their financial future.

Frequently asked questions