Ynab Guide: Budgeting Cash Value Life Insurance

Life insurance is an important financial product that can provide peace of mind and protect your loved ones financially in the event of your death. There are several types of life insurance policies available, each with its own features and benefits. One type of life insurance policy is the cash value life insurance policy, which includes a death benefit and a cash component that can be accessed by the policyholder during their lifetime. This type of policy is also known as permanent life insurance and is designed to help protect your loved ones from financial strain if you pass away.

When considering how to budget for cash value life insurance in YNAB (You Need A Budget), a popular budgeting software, it is essential to understand the different categories of expenses and how the cash value in your policy can be utilised. Some people choose to create a specific category for life insurance within YNAB, such as Life Insurance or Insurance, while others include it under broader categories like Fixed Expenses or Quality of Life. Additionally, since cash value life insurance can serve as an emergency fund, you may consider categorising it as such within the software.

The cash value component of your life insurance policy can be a versatile tool. It can be used to pay policy premiums, take out loans at lower rates than traditional banks, create investment portfolios, or supplement retirement income. Withdrawing cash value from a life insurance policy can be done through surrendering the policy, taking out a loan against the cash value, or making partial withdrawals, depending on the specific policy.

When budgeting for cash value life insurance in YNAB, it is important to consider the premium payments, which are typically divided into three categories: a portion goes towards the death benefit, another covers the insurer's costs and profits, and the remaining contributes to the policy's cash value. As you age, the money allotted to cash value decreases while the amount paid towards insurance increases. Therefore, it is crucial to factor in these changing costs when creating your budget.

In conclusion, budgeting for cash value life insurance in YNAB involves understanding the different categories of expenses, the utilisation of cash value, and the changing costs associated with premium payments over time. By incorporating this knowledge into your financial plan, you can make informed decisions about how to best utilise cash value life insurance within the YNAB budgeting software.

Tracking cash value life insurance in YNAB

YNAB (You Need a Budget) is a budgeting tool that can be used to track various types of expenses, including insurance. While YNAB is primarily used for expense tracking, it can also be utilised to monitor your cash value life insurance policy. Here are some steps and strategies for effectively tracking cash value life insurance in YNAB:

• Categorisation: Create a dedicated category for life insurance within YNAB. This will allow you to track your life insurance expenses separately from other insurance types, such as home or auto insurance. You can further customise this category based on your preference, such as "Life Insurance" or "Annual Expenses."
• Frequency of Payments: Consider how frequently you make payments towards your life insurance policy. If you pay annually, you can include it within your "Annual Expenses" category. Alternatively, if you pay monthly, you can set it up as a "Monthly Bill." This ensures that you accurately track your life insurance payments according to your payment schedule.
• Tracking Options: Decide whether to track your cash value life insurance as an on-budget or off-budget account. Some users prefer to have it as a tracking account, updating the balance every few months. This provides a clear picture of the cash value accumulation without directly impacting your budgeted funds. Others may choose to include it in their budget, treating it as an emergency fund or savings account.
• Premium Allocation: Understand how your premium payments are allocated. In a cash value life insurance policy, your premiums are typically split into three categories: a portion goes towards the death benefit, another covers the insurer's costs and profits, and the remaining contributes to the policy's cash value. Knowing this breakdown will help you track how your payments are utilised and how the cash value accumulates over time.
• Policy Details: Familiarise yourself with the specific details of your cash value life insurance policy. Different policies have varying ways of accumulating cash value. For example, whole life policies offer fixed cash value accounts, while universal life policies base accumulation on current interest rates and investments. Understanding the specifics of your policy will help you accurately track its performance in YNAB.
• Utilising Cash Value: Keep track of the options available for utilising the cash value in your policy. Depending on the type of policy you have, you may be able to withdraw cash value, take out loans against it, or use it to pay premiums. Consider how these options fit into your overall financial strategy and track them accordingly in YNAB. For instance, if you decide to take out a loan against the cash value, ensure you create a loan tracking account in YNAB to monitor the repayments effectively.

Understanding cash value life insurance

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. This type of insurance is more expensive than term life insurance as it includes a savings element. Cash value insurance policies do not expire after a specific number of years, and the policyholder can borrow against the policy or withdraw cash from it.

Permanent life insurance policies such as whole life, variable life, and universal life can accumulate cash value over time. A portion of each premium payment is allocated to the cost of insurance, while the remainder is deposited into a cash value account. This cash value earns interest, and taxes are deferred on the accumulated earnings. As the cash value increases, the insurance company's risk decreases as the accumulated cash value offsets part of the insurer's liability.

There are several ways to access the cash value of a life insurance policy. Partial withdrawals are usually permissible, although they may reduce the death benefit. Some policies allow unlimited withdrawals, while others restrict the number or amount of withdrawals. Policy loans are also possible, with interest charged by the issuer on the outstanding principal. The outstanding loan amount will also reduce the death benefit if the policyholder dies before full repayment.

Cash value life insurance provides policyholders with the ability to borrow against the accumulated cash value, which comes from regular premium payments plus any interest and dividends credited to the policy. This type of insurance may be suitable for those looking to build a nest egg over several decades, in addition to a retirement plan. However, cash values often take time to accrue, and there may be a waiting period or penalty for early withdrawals.

When deciding whether to purchase cash value life insurance, it is important to consider the pros and cons. While it offers lifelong coverage, tax advantages, and the ability to borrow or withdraw funds, it is more costly than term life insurance and may not be necessary for those who do not require insurance for their entire lives. Additionally, cash value can take time to build, and withdrawals may reduce the death benefit for beneficiaries.

Pros and cons of cash value life insurance

Cash value life insurance offers a range of benefits, but it also has some potential downsides. Here is a breakdown of the pros and cons to help you decide if it is a good fit for your needs.

Pros of Cash Value Life Insurance:

• Access to funds while living: Policyholders can access the cash value for loans or withdrawals during their lifetime, providing financial flexibility for unexpected expenses.
• Tax-deferred growth: The cash value grows tax-deferred, meaning you don't pay taxes on the interest earned unless you withdraw it, allowing your savings to grow faster.
• Fixed or potentially higher returns: Depending on the policy type, you can earn a steady interest rate (whole life) or take advantage of market-linked growth opportunities (variable or indexed policies).
• Premium flexibility: Many policies let you overpay your premiums to build up the cash value faster, giving you more funds to access later.

Cons of Cash Value Life Insurance:

• Higher premiums: Cash value policies typically have higher premiums than term life insurance policies, so make sure the additional cost fits within your long-term budget.
• Fees and expenses: Cash value policies often come with extra fees and charges, especially in the early years, which can impact the growth of your cash value.
• Potential impact on the death benefit: Withdrawals or unpaid loans from your cash value may reduce the death benefit paid to your beneficiaries.
• Slow accumulation: It can take several years for the cash value to grow, so it may not offer immediate financial benefits.
• Complex structure: Cash value policies are more complicated than straightforward term policies, so understanding the specifics of your policy is important for effective management.

How to withdraw cash value from a life insurance policy

There are a few ways to withdraw cash from a life insurance policy. The first is to surrender the policy, which means cancelling it and taking the surrender value cash payment. However, this also means losing life insurance coverage, and the cash received may be lowered by any fees taken out. Surrender fees can be significant, especially for newer policies, and surrendering a policy before retirement age is generally considered a last resort.

The second option is to simply withdraw cash from a permanent life policy. This money is often not subject to income taxes as long as it does not exceed the amount paid into the policy. However, there are some disadvantages: your death benefit will likely be reduced, and that reduction may be greater than the amount withdrawn, depending on the specific terms of the policy.

The third option is to take out a loan using the policy as collateral. The money does not come out of the policy but is lent by the insurer, with interest payments typically at a lower rate than personal loans or home equity loans. There is no loan application or credit check, and the credit rating does not impact the interest rate. However, any outstanding loan balance will be deducted from the death benefit.

The fourth option is to use the cash value to pay life insurance premiums. This is a popular option for older policyholders who want to continue their coverage while using retirement income for living expenses.

It is important to note that the cash value of a life insurance policy will usually take a few years to grow to a usable sum. Additionally, the way you access your cash value can impact the amount available, your death benefit, and your account's growth, so it is recommended to consult a financial advisor before making any decisions.

Categorising life insurance in YNAB

There are several ways to categorise life insurance in YNAB, depending on your personal preference and financial situation. Here are some options:

• Monthly Bills: If you pay your life insurance premiums monthly, you can include it in this category. This way, you can easily track your regular expenses and ensure that you are keeping up with your payments.
• Quality of Life: The purpose of life insurance is to provide financial protection and peace of mind in case of unexpected events. Therefore, categorising it under "Quality of Life" can be a good reminder of the value it brings.
• In Case of Emergency: Some users choose to include life insurance in this category, especially if it is intended to serve as an emergency fund. This category may also include other related expenses such as home and auto deductibles.
• Annual Expenses: If you pay your life insurance annually, you can group it with other yearly expenses such as property taxes and car insurance. This helps you plan and save for these significant costs that occur less frequently.
• Fixed Expenses: Life insurance can be considered a non-negotiable, essential expense for many individuals and families. Including it in the "Fixed Expenses" category emphasises its importance and ensures that it is consistently budgeted for.
• Insurance Category: You can create a dedicated "Insurance" category and include various types of insurance as subcategories, such as medical, dental, vision, life, long-term disability, auto, homeowners, and umbrella insurance. This provides a comprehensive view of all your insurance-related expenses.
• Transportation Category: Similar to how auto insurance is categorised, you can include life insurance in a broader "Transportation" category if it is related to vehicle ownership and expenses.

When deciding on a category for life insurance in YNAB, consider factors such as the frequency of payments (monthly, annually, etc.), the purpose of the insurance, and how it fits within your overall budget and financial goals. You may also want to think about whether you want to group it with other similar expenses or keep it separate for easier tracking. Ultimately, the categorisation should align with your personal financial situation and budgeting preferences.

Frequently asked questions