Cash Value Life Insurance

Life insurance is critical when it comes to protecting your family, securing your financial future, and leaving a legacy. Because of its importance, Andrew Carnegie called life insurance the fourth pillar of Americanism. When talking about life insurance, most people think of the death benefit. This is because life insurance death benefits have been there for grieving families during times of great loss. Death benefits have allowed children to continue receiving private education after losing a parent. Death benefits have allowed families to keep their home. Death benefits have kept businesses alive and put food on the table. No one likes to think of their death, but those who wisely plan for their family's well-being by purchasing life insurance are true heroes. In addition to death benefits, some life insurance also provides life benefits available to the policyholder during the life of the insured. When planning for college expenses, income replacement, and retirement, the life benefits of life insurance are extremely valuable. Participating whole life insurance is the best type of life insurance to purchase when planning for life benefits. This is because participating whole life insurance has a cash value that accumulates during the insurance lifetime, which can be accessed and used at any point for anything. Many common uses of cash value include college tuition, debt payoff, business expansion, retirement planning, care for aging parents. Participating whole life insurance is not the only type of insurance that develops a cash value. Whole life, universal life, variable life, and indexed universal life all have cash value elements. However, it's important to understand the differences in these types of life insurance policies because cash value in whole life policies is not the same as cash value in universal life policies. With whole life insurance, participating or traditional, the cash value represents a part of the death benefit you actually own. This is called paid-up insurance. The insurance company makes the cash value associated with this paid-up insurance available to you. Over time, the paid-up insurance grows, thus increasing the amount of cash value you can access. With universal life policies, the cash value is not always tied to the death benefit because the death benefit consists of term insurance, and term insurance has no cash value. Instead, the cash value in indexed and variable life policies is the result of excess premium payments and the earnings in either the indexed mirroring accounts for indexed universal policies or the market returns for variable universal policies. The insurance company subtracts any fees associated with the policy before crediting value to the accumulated cash account. So some key takeaways here are permanent life insurance policies have both cash value and death benefit, and the cash value in whole life policies is tied to the death benefit. Term life insurance does not have cash value, and universal life policies are built on term insurance. So there are several things you can do with the cash value of your life insurance policy, and here are five ways to access cash value as well as an option for boosting the cash value available to you. So the first option is a policy loan, and you have access to the cash value of your policy at any time through a policy loan. This loan is an interest-only loan, which means the principal never has to be paid back. Instead, loan interest is all that is required. Loan interest rates vary from company to company and can increase or decrease from year to year according to the loan interest provisions specified within the policy contract. The second option is a withdrawal. At any time, you can choose to withdraw cash value from the policy, but make sure you understand this information before initiating a withdrawal from a whole life policy. A withdrawal is actually a partial surrender. Withdrawals are permanent. Unlike a loan which can be repaid, once you withdraw cash value, you cannot reverse the withdrawal. So depending on the amount, a withdrawal could also create a taxable situation. Withdrawing money from a whole life insurance policy surrenders the portion of paid-up insurance or the death benefit that is tied to the cash value withdrawal. Cost basis of the policy is very important when it comes to withdrawals. Cost basis is the total amount of premium that you've paid into the policy. Since the growth in a life insurance policy is tax deferred, withdrawing an amount that exceeds the cost basis will trigger a taxable situation. Taxes will occur on any amount exceeding the cost basis. Taxes are only incurred when money comes out of the policy permanently, either by withdrawal or for full surrender, and policy loans are not taxable. So the third option is to pay policy premiums. You can use the cash value of the policy to pay premiums that are due. And the most common way to do this is through an internal policy loan. This is the same process as taking a regular policy loan, except the insurance company will not send the loan value to you. Instead, they will process loans and apply the funds to pay your policy's premium internally. Keep in mind this loan will bear interest, just like any other policy loan. So paying your premium through a policy loan is not a good long-term policy funding strategy. Option number four is a full surrender. You can always access cash value through a full surrender, but just like a withdrawal, a full surrender can also trigger taxes if the surrender value of the policy exceeds the cost basis. Surrenders, whether partial or full, are always permanent and cannot be reversed. When you surrender a policy, you forfeit the policy's death benefit. And then the fifth option is to boost the cash value and the death benefit. And a good way to boost the cash value and death benefit of a life insurance policy is through dividends. If you are purchasing a participating whole life insurance policy, you will be able to elect a dividend option. The best dividend option for increasing your cash value and death benefit is the PUA dividend option. And this stands for paid-up additions. This option sets the dividend to purchase paid-up additions to increase your paid-up insurance. And since cash value is tied to the paid-up insurance of a whole life policy, this dividend option will increase the amount of cash value available to you at the same time it increases your death benefit. This option is only available in participating whole life policies. And then we have some policy funding options. Many people purchase life insurance to provide for future needs, but sometimes unexpected situations arise which can make it difficult to maintain the life insurance purchased. Whether it's a rising premium, a loss of income, unexpected expenses, or something else, there are always ways to reduce or eliminate the premium on your life insurance policy without losing the coverage and benefits it provides. Here are three ways you can reduce and eliminate premiums or combat a rising premium on a life insurance policy. The first way is through a reduced paid-up option. So you can elect a reduced paid-up option on a life insurance policy. When this option is elected, the insurance company cancels the contract premium for all future years of the policy. This change to the contract premium will also cause a change to the contract's death benefit. Since the insurance company will no longer be receiving premiums, they adjust the death benefit down to match the value of paid-up insurance in the policy. And this value will remain constant without requiring additional premiums. Future policy growth will be substantially slowed with this option, but with the dividends, the death benefit may continue to increase over time. Second option is to use the dividends to pay the premium. If you own a participating whole life insurance policy, you can have your dividend applied towards your premium. Dividends are not guaranteed until they're paid, and in the early years of a policy contract, dividends can be quite small. Purchasing a policy with the intent to have the dividends pay the premiums is not a good strategy, but dividends can be used to pay the policy's premium or at least reduce the amount of premium you have to pay each year. And then the third option is a 1035 exchange. If you have a life insurance policy and the premium is increasing each year, it's likely that you have a term policy or some type of universal life policy. Term insurance with increasing premiums can be replaced with a new term policy that has a level premium period or a permanent life insurance policy with a level premium. This option is available as long as you are in good health and under the age of 80. If you have a universal life policy and the premium is increasing, you may be able to exchange your existing policy for a whole life policy with a level premium. When you exchange a permanent life insurance policy for a new permanent life insurance policy, that process is called a 1035 exchange. In order to be eligible for a 1035 exchange, you must be insurable. Once the new policy has been approved, the insurance company will take the value of your old policy and roll it into the new policy. There are lots of different terms and phrases specific to life insurance pertaining to how the policies are structured, how the policies work, and what you can and cannot do with them. At Life Benefits, we try to make it easy for you to understand how life insurance works because you shouldn't have to learn a new language in order to get the benefits that life insurance can provide you and your family. If you have questions about your policy, need clarification, or help understanding anything related to life insurance, we are here for you. If you want to purchase life insurance and have peace of mind knowing the policy will be designed to benefit you and provide for your family, please contact us. It would be an honor to assist you.