How Do Permanent Cash Value Policies Work?
Life insurance can provide numerous benefits to both individuals and businesses. It should be included as a part of any good financial plan. Should an individual pass away, a life insurance policy can provide a variety of important benefits to that person’s loved ones, including paying off debts, covering funeral and other related expenses, making up for lost income, or paying for a child’s future education.
In addition, life insurance is also used by many for the purpose of paying estate taxes that are due. The purchase of life insurance should be considered by anyone who has loved ones and / or business associates that are depending upon them for financial support. There are essentially two primary types of life insurance policies on the market today – these include term and permanent. Term life insurance is considered to be temporary coverage. Every year the policyholder pays a premium in order to cover the cost of this pure death benefit protection.
Although term life insurance typically starts out with a lower premium in relation to permanent insurance with a similar death benefit, term policies build no cash value and, after a predetermined number of years, it must be renewed – pending the health of the insured.
How Does Whole Life Insurance Work?
Whole life insurance is a form of permanent life insurance protection. These policies offer a fixed premium to the policyholder that will not increase over time, along with a guaranteed amount of death benefit. In addition, these types of policies offer a cash value feature that is typically guaranteed to grow each year.
During the early years of a whole life insurance policy, the premiums may be higher than those of term insurance. However, the cash value build up that is contained within a whole life plan can grow significantly over time, and can be accessed by the policy holder through cash surrenders or policy loans.
This cash accumulates on a tax-deferred basis, allowing the policyholder to potentially grow their funds faster than they can in other savings types of vehicles that are taxed on their growth each year.
The premiums that are paid for whole life insurance are based on several factors, including the insured’s current age, health status, and amount of the death benefit desired. They are also determined based on the amount that is paid for the pure death benefit protection in combination with the amount that will be placed in the cash value component of the policy.
The Many Benefits
Unlike term life insurance policies, whole life insurance can provide the policyholder with a guaranteed amount of death benefit with a premium that will never change. In addition to a set amount of protection and a level premium, whole life can also offer policyholders:
- Tax deferred growth on cash value earnings
- Death benefit that is income tax free to beneficiaries
- Tax free cash for surrender or loans
- The option to take additional cash in the form of dividends
- Living Benefits – which is the ability to use some or all of the death benefit proceeds for needs during life such as long term care, disability, or other chronic illness expenses
- The potential to add additional coverage at a later time
- The ability of business owners or partners to use funds for finding a replacement for the loss of a key individual or executive
Indexed Universal Life
There are several different variations of whole life insurance plans. In addition to pure whole life policies, another very popular option, especially in the market we’re experiencing is Indexed Universal Life (IUL).
IULsallow the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P500 or the Nasdaq 100. IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit.
People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key-person insurance for business owners, premium financing plans or estate-planning vehicles. IULs are considered advanced life insurance products in that they can be difficult to adequately explain and understand. They are generally reserved for sophisticated buyers.
Who Should Consider Whole Life Insurance? How Do Permanent Cash Value Policies Work?
Due to its level premium amount and the accumulation of cash value, a whole life insurance policy could be a good choice for those with long-range insurance protection needs. Since whole life insurance protects you for your “whole life,” you have the peace of mind in knowing that the death benefit protection will be there for loved ones when they need it, yet the funds in the cash value component of the policy are available for needs during your life.