Cash value life insurance, also known as universal life or whole life insurance, is a form of life insurance that creates cash value. You can pay this cash value for a number of different options including premiums payable, withdraw a portion of cash to use as retirement income, or surrender the entire policy and pay some cash Transfer to other investments.
Unlike term insurance, a cash value style policy does not have an expiration date. This means that they can remain in force for the rest of your life. But some cash-value products have a maturity date that may require you to accept the cash value created in the policy and cancel your death benefit.
How do cash value life insurance policies work?
Cash value life insurance requires a premium for the death benefit chosen by the policy owner. By paying this premium, the policy creates a cash value.
Once the policy collects the cash value, the policy owner can choose to access the cash value through an array of options. This may include using non-profit benefits provided by a life insurance contract. Alternatively, it can withdraw from the policy through some money withdrawal or policy loan.
Short strings are attached to use the cash value in a policy. Cash value policy owners have the option of withdrawing funds from their policies without facing the limits or taxable consequences found on many retirement investment accounts.
Additionally, cash price policies provide a variety of tax-friendly benefits that attract many insurance buyers to the product.
What is the type of cash value life insurance?
Some people criticize this type of life insurance for their fees. Cash value life insurance policies certainly have fees and some policies have substantial fees.
For some products, these expenses are clearly written into a special report that accompanies the life insurance illustration. But for other products, the cost is very difficult to ascertain. This, not surprisingly, leads to criticism and warnings about cash value-style products.
Universal life insurance products will provide a detailed fragmentation of policy expenses. This report is accompanied by a life insurance illustration. Here is an example of a typical policy cost breakdown report:
This report shows us the annual charges levied against the policy in the column titled “Policy Charge”. This report also details the loan interest if the policy loan is outstanding (see Years 29 and 30).
Whole life insurance, on the other hand, does not provide details on policy costs. Some people call whole life insurance a “black box” for this reason. The product operates in relative secrecy and does not disclose the actual fees charged by the insurance company to the policy.
Types of policies
Life insurance options for cash value-style products come in two basic forms; Whole life insurance and universal life insurance. Both types of life insurance operate under the basic principles of any life insurance policy. They both offer life insurance coverage, must pay a premium that you must pay for a fixed term, and both of them will pay the death benefit to the beneficiary in the name of your death.
Additionally, both policy types offer a cash value account and they are both considered permanent life insurance policies, which will last throughout your lifetime.
A full life insurance policy will provide several guarantees. These include guaranteed premium, death benefit guarantee and accumulated cash value guarantee. In the Whole Life policy, there will be a more rigorous premium payment in lieu of these guarantees. Whole life policies do not have a surrender fee, so the cash value of your policy will also be the cash surrender value of your policy.
Whole life policies come from mutual insurance companies. These insurance companies are owned by their policyholders. Mutual insurers have financial obligations to these policyholders.
Universal life insurance provides most of the guarantees offered by the Whole Life policy to provide high potential non-guaranteed facilities. A universal life policy also provides considerable flexibility of policy premium. Surrender charges are a common feature found on universal life insurance, so this means that the cash value of the policy is not necessarily the cash surrender value.
There are many different types of universal life policies. Those variables include universal life insurance, indexed universal life, and “current perception” universal life. Variable life insurance puts the cash value of the policy into an investment account where it increases and comes with the performance of the investment. Indexed UL Insurance pays an interest rate that tracks a stock market index. Current assumptions determine the annual interest rate payable on the cash value of a product policy.
How do you access the cash value?
The main attraction for a cash value insurance policy is its cash accumulation facility. Many people prefer to use this type of life insurance as a savings account. The appeal is a much more effective interest rate on their savings versus the traditional money market or savings account. In these policies, cash grows at a higher rate than bonds, but also provides better liquidity.
The way you use the cash value in these policies depends on the type of life insurance you own.
You can access the cash value through a partial withdrawal or loan. UL policies allow partial withdrawal of all policy values while whole life policies only allow partial withdrawal of non-guaranteed cash values.
Loans work equally among life insurance types. Both accrue interest, which you can choose to pay out of pocket or add to the outstanding loan balance. Loans enjoy special tax benefits that prevent them from creating income tax liability – this is true for both types of products.
You can use your whole life insurance cash value for three nonprofit benefits: extended insurance, reducing cash-payout or surrendering for cash value.
Universal life policies only allow the surrender of cash value to nonprofit benefits.
What type of policies do insurance companies issue?
Mutual insurance companies often issue whole-life policies. But the whole life can also come from other forms of insurance companies. Additionally, fraternal companies often issue whole-life policies. Fraternals are not technically insurance companies, but they operate under very similar protocols.
Universal life insurance policies come from a broad mix of life insurance companies. Some mutual funds offer UL policies, but it is more common to see this type of cash value policy from a stock life insurance company.
It is important to understand that not all life insurers issue every type of life insurance policy. So while some companies may issue one or the other, you should not expect that they will offer both types.
Do I have to buy from an agent?
If you are seeking a cash price policy, you will need to purchase from an agent / broker. When you can buy life insurance policies from many different places that do not use insurance agents, cash value policies are different.
The complexity of these policies makes it very difficult to introduce them in an automated manner as some companies operate with a term life policy. The insurance premium you pay for the death benefit of the policy can vary greatly depending on many factors. It includes various policy features and any chosen riders.
In addition, cash value policies can create tax penalties due to revised Endowment Contract (MEC) limits imposed on them by the IRS. A knowledgeable life insurance agent is available to help guide you through this which can save you from a significant hassle.
Will I earn a dividend?
If you buy whole life insurance, you can earn dividends. Life insurers do not guarantee the payment of dividends, and you must ensure that your entire life policy is “part” to earn them.
UL style policies do not pay dividends. Instead, they pay interest that can fluctuate from year to year. Or, in the case of variable life insurance, the cash value will change depending on the value of the investment used in the policy.
What kind of return will I get?
Your rate of return on the cash price policy will depend on several factors. The main variables that affect the rate of return are the life insurance premiums you pay relative to the death benefit of the policy. Your gender may play a smaller role in most states, with women achieving slightly better returns at the same age when they enjoy marginally lower insurance costs.
Returns on these life insurance policies will track the returns received by a portfolio managed by a life insurance company – also known as a general account. You should reasonably expect annual returns of around 4 to 4.5% over your lifetime.