If you are considering permanent life insurance – such as whole life, universal life, or variable life insurance – you probably know that these types of policies provide both death benefits and cash value accumulation. You can use the cash value for many different needs, including your living expenses in retirement.
Cash value life insurance is a type of permanent insurance policy consisting of a “death benefit,” which is a standard part of all life insurance policies, as well as a cash value accumulation feature. Whole life, universal life, and variable life insurance are the three primary types of cash value life insurance.
When you pay your premium, a portion of that payment is allocated towards the cash value. The life insurance company invests the money into a conservative-yield form of investment. The cash value grows over time as you continue to pay your premium and through the interest you earn.
The life insurance cash value is the amount of money you have built up through your premium and investment interest for the length of time you have owned the policy.
When you pay your insurance premium for a permanent life insurance policy, the money is generally allocated in three portions:
The cash value builds from a combination of each premium payment you make and the interest earned from the investments made by the life insurance company.
The cash value generally grows slowly in the first few years of the policy then experiences more significant growth later. The cash value accumulation then slows again as the policy holder ages and more of the premium is applied to the death benefits.
The life insurance cash value growth is dependent on both the premium and how well the life insurance company’s investments perform. Some forms of permanent life insurance policies offer a guaranteed minimum rate of return. You’ll benefit when the investments perform well; you earn a higher return on the investments, and can be protected if the policy has a guaranteed rate of interest when economic times are slower. Additionally, some insurance companies will also pay a dividend if fewer life insurance policies are paid out in a given year.
The rate of return on the investments made by any life insurance company varies for a variety of reasons:
The overall return rate of investment on a policy that has been in place long term can be 4.97% or higher on an annual average for the life of the policy. When you are comparing life insurance companies and policies, be sure to work with a knowledgeable independent agent who can assess how well various permanent life insurance companies have performed.
You might be wondering if and when you have to pay income tax on the cash value portion of your policy. This is how the tax situation works.
These dividends are not taxable until or unless the dividends you receive exceed the total amount of premiums paid on your particular policy. Any dividends you receive that exceed the total amount of premiums paid on your policy are considered taxable. The excess dividends will be taxed regardless of how you use them.
The cash value and the cash surrender value are inherently the same. The difference between the cash and the surrender value is that if you surrender your policy (for example, if you choose to cancel and cash out the life insurance policy), you will receive the cash value that has accumulated less any applicable surrender charges; these charges are pre-determined by the life insurance company, and are stipulated in your policy contract.
Note that there is a “surrender period,” which is the period of time that a policyholder must wait before it is possible to receive the cash value of the policy upon canceling. If the policyholder cancels the policy before the end of the surrender period, it is not likely the policyholder will receive any amount of the cash value because these costs are incurred by the insurance company to set up the policy.
After the surrender period ends, you can typically take out a loan against a portion of the available cash value. Note that you should only do so for an express purpose, and that there are several things to consider:
A life insurance cash value policy can help you build up a substantial savings over time and can be especially advantageous if you aren’t very investment savvy or have difficulty saving money for your retirement.
There are many different versions of these types of policies and they vary in how they are structured. You are best advised to contact a local independent agent in the Trusted Choice network who can provide unbiased information about cash value life insurance policies versus term life insurance policies. One of these agents, right in your area, can help to evaluate your financial needs and goals and answer your questions about various life insurance options.
Find an agent today to learn more about permanent life insurance cash value policies and get the coverage you need.