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 insured’s lifetime which can be accessed and used at any point for anything.
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 is important to understand the differences in these types of life insurance policies because cash-value in a Whole Life policy is not the same as cash-value in a Universal Life policy.
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 index 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.
There are several things you can do with the cash-value of your life insurance policy during your lifetime. Listed here are five ways to access cash-value as well as an option for boosting the cash-value available to you.
#1 – Policy Loan
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. 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.
#2 – Withdrawal
Rather than taking a policy loan, you may wonder, “Can I withdraw money from my life insurance policy?” The answer is yes! At any time, you can choose to withdraw cash-value from the policy. Make sure you understand the following information before initiating a withdrawal from a Whole Life policy.
A withdrawal is actually a partial surrender. It’s taking cash value from whole life insurance instead of borrowing cash-value. Withdrawals are permanent. Unlike a loan which can be repaid, once you withdraw cash-value, you cannot reverse a withdrawal. Depending on the amount, a withdrawal could create a taxable situation.
Withdrawing money from a whole life insurance policy surrenders the portion of Paid-Up insurance (death benefit) tied to the cash-value you withdraw.
Cost basis of the policy is very important when it comes to withdrawals. Cost basis is the total amount of premium you have 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 cost basis. Taxes are only incurred when money comes out of a policy permanently…either by withdrawal or full surrender. Policy loans are not taxable.
#3 Pay policy premiums
You can use the cash-value of the policy to pay premiums that are due. 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 the loan and apply the funds to pay your policy’s premium. 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.
#4 Full Surrender
You can always access cash-value through a full surrender. 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.
#5 Boost Cash-value and Death Benefit
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. This option sets the dividend to purchase Paid-Up Additions to increase your Paid-Up insurance. 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.
Many people wonder: What happens to cash value in whole life policy at death? Remember that cash-value in a whole life policy is based on the amount of death benefit you actually own. This is called Paid-Up Insurance. When the insured dies, the whole death benefit amount including the Paid-Up Insurance will be paid to the beneficiary. When the death benefit is paid, no cash-value is left in the policy.
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 rise in premium, loss of income, unexpected expenses or something else, there are 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.
#1 – Reduced Paid-Up
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. This value will remain constant without requiring any additional premiums. Future policy growth will be substantially slowed, but with dividends the death benefit may continue to increase over time.
#2 – Dividends to pay premium
If you own a Participating Whole Life insurance policy, you can have your dividends applied towards your premium. Dividends are not guaranteed until they are 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 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.
#3 – 1035 exchange
If you have a life insurance policy and the premium is increasing each year, it is likely 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 the 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 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. Schedule a free appointment, and we’ll help you get the best insurance for you and your family.