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Capturing Cash Value in Life Insurance

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.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.
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