21 Best Benefits Whole Life Insurance
- Whole life insurance doesn’t have a term – it’s known as permanent insurance.
- You pay a premium that covers the cost of insuring your life, company overheard, and profit margin, but it also includes a cash value.
- That means that permanent insurance policies have account values that grow every time you pay the premium.The cash value will also grow over time on its own. Most whole life policies guarantee a minimum annual return, and share projections (which are often overly optimistic) of greater returns above the guaranteed minimum.
- The investment returns will vary based on the insurance company’s own investment performance. Remember, they’re taking your premium dollars and investing them in their own portfolio.
- Over time your cash value grows on a tax-deferred basis.
- You can borrow from it if you like, or withdraw it entirely and surrender the policy.
- For people who struggle to consistently save money, whole life insurance can be a way to force yourself to build long-term savings while also providing financial protection.
- It may not be the most efficient savings account, but having some savings is better than having none, and the savings you do accumulate can be withdrawn for any reason. Taxes are also deferred while the money is inside the account, which can be a benefit for high-income earners who have already maxed out their other tax-advantaged savings accounts.
- Cash value life insurance provides life insurance protection and can build future savings for your retirement. This type of life insurance is a combination of a death benefit coupled with a savings or investment account. Cash value life insurance includes whole life, universal life, variable life, and variable universal life.
- Cash value life insurance is not a “rip off” at all. The life insurance company isn’t stealing anything from you, or anyone else. There is no trickery or malicious intent involved at all. You are getting exactly what you paid for – a leveraged savings tool.
- The cash value is a cash reserve. When the cash value accumulates in a policy, it builds up against the value of the death benefit and effectively replaces it. When you take out a policy loan or withdraw money from the policy, this is why you see the death benefit decrease along with the cash value. When you die, you can’t have your cake and eat it, too. In other words, you get the death benefit, part of which is comprised of the cash reserve. During your lifetime, that cash value kept you from paying ever increasing costs of insurance. That’s why your premium remained level.
- You may have put $15,000 into a life insurance policy, and may only have $10,000 in cash value in the first 5-10 years. At death, your heirs will have to “suffer” with $100,000 of death benefit you purchased, which is 10 times the amount of the cash value. How, exactly, this is supposed to be a rip off, I’m not sure.
- If the life insurance company has received $15,000 in premium payments from you, and they turn around and pay out $100,000, it doesn’t take a math wiz to see that you are benefiting here. There is just no way that you could have somehow given your family $100,000 income tax free with $15,000 sitting in a savings account earning 1% (even 5% on high yield savings accounts).
- Some “gurus” argue that if you died and had bought term and invested the difference, you would have the value of your savings plus the term insurance death benefit. And, you could, but these “gurus” are forgetting that most term policies never pay a death benefit so this theory just won’t come to fruition for most folks. So what you are really getting is a taxable savings that may or may not go through probate (depending on whether you had all of your savings invested in a retirement account, or sitting in a savings account).
- If you actually held a term policy until your death, you would likely pay much more in insurance premiums than what the “gurus” would have you believe, since term insurance becomes quite expensive in your old age. If you died young, then you simply wouldn’t have the savings built up that the “gurus” promise.
- If you really wanted to try to pull off getting the death benefit plus your savings, buy a dividend-paying whole life policy or a universal life insurance policy with an increasing death benefit. Your death benefit grows over time, effectively giving you the savings plus the cash value of the policy. Problem solved.
- The guarantees provided by fixed life insurance come from bonds and bond-like instruments that the insurance company holds.
- A bond is a long-term IOU. It is a contract that represents a loan from a corporation or the U.S. Government. With a bond, you know up front exactly how much interest the bond will pay, what the returns will be, and these returns are guaranteed. The only real risk taken in a bond is whether or not the institution will pay. If the institution that is issuing the bond can meet its financial obligations, then it will pay the interest specified in the bond every year and no less.
- Many of the bonds in a life insurance company’s general investment account are investment grade bonds. Investment-grade bonds are bonds, like corporate bonds, that have a very low risk of default. These are bonds that are usually issued by very high profile, old companies with a solid track record or repayment history.
- Some of the bonds in the insurance company’s investment portfolio are U.S. Government bonds. These bonds pretty much never default. By investing in both types of bonds, an insurance company can make a meaningful guarantee to the policy holder that actually has substance.
- One important thing to note is that, unlike bonds, a life insurance contract provides guarantees that, generally, a bond cannot. Additionally, in fixed-type permanent life insurance, your interest credited to the policy may rise if interest rates rise. This is true with dividend paying whole life, interest-sensitive whole life, and fixed universal life insurance. So, when interest rates climb, you’re not stuck with a low fixed rate in your policy.
Can you borrow from your Cash Value Life Insurance Policy?
All you have to do is ask for the money. The insurance company uses your policy’s cash value as collateral for the loan. It’s sort of like putting money into a savings account and then getting a signature loan. What does the bank do with a signature loan? They secure it with the money you deposited in your savings account. It’s the exact same thing that happens with a life insurance policy loan (except that the insurance company pays a much higher rate of interest on that savings account to offset the interest on the loan you are taking).
When you run out of collateral, you can’t borrow any money from the insurance company. But, because the policy is being used as collateral, there are no applications, credit checks, or anything else associated with these loans. You just ask for the money and they give it to you. Unlike traditional loans, you get low-or 0%-interest rate for the life of the loan, which doesn’t ever have to be paid off until you die (and then, they take the money from your death benefit to satisfy the loan). You couldn’t ask for better loan terms from any bank or any other financial institution for that matter.
Well gee, you put money into this policy and you can’t just take it right back out? I have to borrow money from the insurance company and use my policy as collateral? I’m not sure I like that….wait….do you want to know what the major benefit of having a savings like this is?
You get all of that money on a tax-free basis!
Holy cow, that’s amazing! Yep, you-and only you-get to control your savings without worrying about paying taxes on the money because you are “accessing” the money through loans, which is not income or gain according to the IRS. And, did I mention that the loans carry low (1%) or no (0%) interest on them? Meanwhile, the policy’s cash value continues to grow and continues earning interest to offset the interest you’re being charged for those loans. To be fair, you also need to make sure that you do not “overloan”. Overloaning is when you attempt to borrow more than what is in the policy and it lapses. If this happens, the loans are considered “forgiven” and you need to pay taxes on all of the interest you’ve earned for the life of the policy. Insurance companies are very good and preventing this from happening by either suspending borrowing when you’ve borrowed 95% of your cash value, or they at least warn you that you are about to lapse the policy and that it’s time to pay back some of the money you borrowed.
Another option on some life insurance policies is a withdrawal option. You don’t have to pay interest to access your money (even though, as discussed above, this is not really a major issue due to the design and terms of policy loans). Most policies have a withdrawal option where you may access either all or part of the cash value of a life insurance policy directly without taking loans. The terms of withdrawals vary from company to company, but are typically very liberal – especially in the later years of your life when you are most likely to need or want the money.
Now the questions you have to answer:
•What would happen if you or your wife weren’t here tomorrow?
•How much income would your family lose?
•Could your family keep your home?
•How much income would you like to have at retirement?
•What would you like to do?
•How many years do you think you’ll be retired?
•Do you think Social Security will be there when you retire?
•How much have you been able to save so far?
•How do you feel about that?
A Cash Value Life Insurance Policy can be the answer for all these questions.
If you have more questions or need a Free Quote for a Whole Life Insurance Policy
Call Mintco Financial 813-964-7100 or 716-565-1300
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