Contract Fund Basics: Life Insurance Explained

A contract fund is the total amount at any time credited to a variable investment option, the Real Property Account, the fixed rate option, and the principal amount of any contract loan plus the amount of interest credited to the contract upon that loan.

Contract Fund Value

The contract fund is the total amount at any time credited to the contract. On any date, it is equal to the sum of the amounts in all variable investment options, the Real Property Account, the fixed rate option, and the principal amount of any contract loan plus the amount of interest credited to the contract upon that loan. The contract fund value changes daily, reflecting:

• Increases or decreases in the value of the variable investment options
• Interest credited on any amounts allocated to the fixed rate option
• Interest credited on any loan
• The daily asset charge for mortality and expense risks assessed against the variable investment options

The contract fund value also changes to reflect the receipt of premium payments and the monthly deductions described under the section on charges and expenses.

Surrender of a Contract

Surrendering a life insurance policy means cancelling your coverage in exchange for a lump sum value. This can be done if you no longer want or need your policy. When you surrender your life insurance policy, you are choosing to use the policy's cash value. A cash value life insurance policy lets you build savings in a special cash value savings account tied to the policy. As you pay the premiums, part of your payment goes into the cash value account. This cash account grows each year.

There are a few reasons why you might want to surrender your life insurance policy. Firstly, the annual cost of keeping the policy may be too high, and you may not be able to afford the premiums. Secondly, you may simply not need coverage anymore, perhaps because you have outlived your beneficiaries or you need the money more than they do. Another reason could be that you have found a better deal with cheaper life insurance that better fits your needs.

It is important to note that when you surrender your life insurance policy, your beneficiaries will no longer receive a death benefit, and you may have to pay fees and taxes on the amount you receive. There may be other options to access your cash value without giving up coverage, such as a policy loan. Therefore, it is recommended to access your policy contract and consult a financial professional to determine the best options for accessing your policy's cash value.

The timing for surrendering your life insurance policy depends on your personal preference and financial situation. Most policies require you to contact your insurance company or agent and sign paperwork to confirm the surrender. There are usually no restrictions on when you can surrender a life insurance policy, but you will likely have to pay surrender fees, which tend to decrease over the policy's life.

Loans

The cash value of a life insurance policy accumulates over time and can be accessed through loans or withdrawals. This cash value can be used to cover significant expenses, such as a down payment on a home, college tuition, or medical emergencies. It can also be used to supplement retirement income, as it can be accessed tax-free.

Policy loans are generally available at any time and do not require an approval process. However, accessing the cash value of a policy presupposes a long-term commitment to keeping the policy active, and therefore, sufficient cash value has accumulated. Taking out a loan against the cash value will reduce the available cash surrender value and possibly the life insurance benefit.

In addition to policy loans, some life insurance policies offer automatic premium loans. This is a provision in the policy that allows any overdue premium to be paid automatically through a policy loan if the cash value is sufficient. This provision helps to keep the policy active and prevents it from lapsing due to non-payment of premiums.

It is important to note that loans against the cash value of a life insurance policy may have tax implications, and it is recommended to consult with a tax advisor to understand the specific tax consequences.

Withdrawals

If you have a permanent life insurance policy, you can withdraw limited amounts of cash from it. The amount you can withdraw depends on the type of policy you own and the company issuing it. Cash-value withdrawals are not always tax-free, and they may be treated as taxable if they exceed your basis in the policy. Withdrawals that reduce your cash value could also lead to a reduction in your death benefit, an increase in your premiums, or cause your policy to lapse.

If your policy is classified as a Modified Endowment Contract (MEC), withdrawals are generally taxed according to the rules applicable to annuities. In this case, cash disbursements are considered to be made from interest first and are subject to income tax, plus a potential early-withdrawal penalty if you're under 59 and a half years old.

You can withdraw up to the amount offered in your surrender cash value payment, which is the cash value amount minus any applicable fees. Withdrawing more than you've paid in premiums may result in income tax on any earnings. Withdrawals will typically result in a reduction in your death benefit and slow the growth of your cash value account.

If you want to take out cash but leave your policy and death benefit in place, consider a life insurance loan or using the cash to cover your premium payments.

Lapses and Reinstatement

If a premium payment is not made during the grace period, the policy will lapse, and the insurance company is no longer obligated to pay a claim. At this point, reinstating the policy becomes more challenging. Some companies may allow reinstatement within 30 days of a lapse without additional requirements, but this varies among providers. After this initial period, the insured may need to fulfil specific requirements, such as providing legally binding statements about their health and undergoing a medical examination.

In some cases, insurance companies may deny reinstatement if the insured's health has significantly deteriorated or if fraudulent information is provided during the reinstatement process. Therefore, it's crucial to act promptly and adhere to the requirements set by the insurance company.

Reinstating a lapsed policy offers several benefits. Firstly, reinstating an existing policy is often more cost-effective than applying for a new one, as the original pricing is usually honoured. Secondly, the age of the insured is not a factor, as the premium remains based on the age at the time of the initial application.

To prevent a lapse in coverage, policyholders can consider setting up automatic payments, reducing unnecessary riders, taking advantage of flexible premium options, using the cash value or dividends to pay premiums, or switching to monthly premium payments.

Frequently asked questions