Whether you’ve been paying premiums for years, or are considering a new policy, there’s much to consider regarding cash value. Life Insurance comes in many varieties, from relatively simple term policies that provide a determined amount to heirs upon the death of the holder, to more sophisticated investment-grade policies designed to provide a death benefit and also a cash value to the holder. Such a cash value can be accessed in a variety of ways while the holder is still very much alive – or can be used to provide further benefits to heirs.
Because policies vary widely, as do individual goals and circumstances, it is important to understand a few basic guidelines – and to consult with an expert while choosing a policy. And if you’re looking into capturing cash value in a policy you already hold, perhaps as a part of your retirement, it is essential that you understand your options before you make a move.
Types of Cash Value Insurance
While there are many variations, most cash value insurance policies boil down to four basic categories:
Whole life
With fixed premiums, whole life, also known as straight, traditional or permanent whole life policies, provide a fixed rate of return as well as a defined death benefit.
Universal life
This variant of whole life enables flexibility in premium payments and the death benefit, as well as the cash value. Unlike whole life, these policies allow the accrued cash value to be applied to premium payments.
Variable life
The cash value of this variant can be invested into a variety of funds, such as stocks, bonds, equity funds, money market, etc. This provides the potential for higher returns on the cash value than whole or universal life policies. Of course, it involves the risk of losses as well. As a result, this type of policy is regulated under federal securities laws.
Variable Universal life
With the flexibility offered by universal life, and the higher return potential of variable life this final variant combines flexibility with the potential for higher returns.
Accessing Cash Value
Too often, policy-holders leave their cash value to the insurance company when they die. If they don’t act to capture the cash value when they can, they lose it. Because the money that gets left on the table is often tax-free, this is a particularly costly mistake to be avoided. Here are a few popular approaches to making sure that doesn’t happen:
Increase the death benefit
If you are not planning to use the cash value yourself, but plan to pass that value along to your beneficiaries, you can usually talk to your insurance company and arrange to exchange your cash value for a higher death benefit. You should aim for a dollar-for-dollar transfer from cash to benefit.
Pay for Premiums
Most insurance companies will allow you to apply any cash value you have amassed to your premium payments. This is an easy way to capture cash value while holding onto a valuable policy at no additional cost.
Take a Loan
Many insurers offer loans on cash value. While you are not required to repay your loan, you will pay moderate interest on it, usually at a lower rate than a bank loan. It is important to note that these loans are not “free money”. If you die, any outstanding loan amount will likely be deducted from the death benefit paid to your beneficiaries.
Withdraw Cash
Many policies allow you to take out your cash value – but often do so only with a reduction in the death benefit. Some policies reduce dollar-for-dollar while others actually reduce the death benefit by more than your withdrawal amount. It is important to understand the details written into your policy, both when selecting the policy that’s right for you and when deciding how best to capture your cash value on an existing policy.
As with any major financial decision, it is essential that you consult with your advisor and fully understand the implications. It should also be noted that most cash-value withdrawals are tax-free – but only up to the basis amount of the premiums you have paid into the policy.
