Whole Life Insurance / Permanent Insurance
The cash value of life insurance policies can be found in permanent insurance such as whole life. Whole life insurance is a popular and unique type of permanent insurance. As the name says, it provides protection for the whole life of the insured individual. Whole life insurance is also sometimes referred to as straight life insurance or ordinary life insurance that is guaranteed to remain in effect as long as the premiums are paid. At the time of purchasing a whole life policy, the premiums are determined ahead of time and are not to set increase over the life of the policy. As the death benefit and the premiums are guaranteed not to change over time, the insurance company would bear any consequences if they were not to meet these obligations.
The younger when purchasing whole life insurance the more affordable your premiums will be.
Cash Value of Life Insurance Policy
The unique feature of whole life policies is the fact that they provide a cash value. The premiums that a policy holder would pay monthly are invested and the income that gets earned creates a cash value. This cash value can be access and used in several ways which are discussed below. The longer you’ve owned the policy, the larger the cash value is and more options for the individual.
Cash Value of Life Insurance Withdrawal – The policy holder withdraw from the accumulated cash value in the policy. This withdrawal would affect the growth of the cash value and reduce any benefit that would be paid. If the withdrawal exceeds the pro-rated adjusted cost base, then a taxable disposition would occur, triggering taxable income.
Cash Value of Life Insurance Loan – A policy holder can access the accumulated cash value of the policy in a form of a loan. The loan would be issued by the insurance company and interest will be charged. Rates charged can differ. The policy would continue to grow uninterrupted but if the loan isn’t paid back, it would be deducted from the death benefit, including interest.
**Keep in mind that the cash value can also be used a collateral at third party institutions if needed**
Surrender the Cash Value – The policy owner can surrender or terminate the policy at any time. The individual would be entitled to benefit from the excess premium payments. The surrender can be whole or partial.
Keep in mind that the insurer may charge you surrender charges to cover their administrative costs. The longer the policy is in effect, the lower the surrender charges.
Automatic Premium Loan – Whole life policies have a automatic premium loan feature which is by default. If the policy owner misses their monthly premium, the insurance company would borrow against the cash value in order to prevent the policy from lapsing.
Policy Dividends of Life Insurance
Whole life insurance pays out dividends and when the policy owner submits the application, they have to decide on how the dividends should be dealt with. Below are some of the common options that are provided to the policy owner.
- Cash Receipt – The dividend would be paid out to the policy holder every year in cash.
- Premium Reduction – A policy holder can reduce the monthly premium that they pay through their dividends payouts. Consider a policy holder who has an annual premium of $4,000 but is eligible to receive $1,000 in dividends. He can reduce his next year’s annual premium to $3,000.
- Paid-up additions – A policy holder can use the dividends to buy new paid up whole life insurance. This is the most common option that policy holders select.
- Dividends Accumulation – Dividends can be accumulated in an investment account where it earns interest income. The income will be taxed depending if the policy is an exempt policy or non-exempt policy
- Term Insurance – With the dividends, a policy holder can buy term insurance with no proof of insurability required.
