Life Insurance comes in many varieties, from relatively simple term policies to more complex whole or permanent policies. Some of these permanent policies include a cash value component. With cash value, a portion of your life insurance policy is invested and may accrue interest over time. Depending on the terms of your policy, you may be able to access this cash value of your policy while you’re still alive.
At Bogart Wealth, we tend to suggest clients stick with term-life insurance policies. However, each of our clients has different goals, and we want to help you understand the role cash values play in permanent or whole life insurance.
Types of Cash Value Insurance
While there are many variations, most cash value insurance policies are a variation on a whole life policy that can be boiled down into three categories.
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
We sometimes see policy-holders forget to capture the cash value in their life insurance policies, meaning the money may go back to the insurance company. It’s as if you (or your heirs) are walking away from tax-free income. To avoid this consider the different ways you might take advantage of the cash value in a life insurance policy.
Increase the death benefit
You may be able to exchange your cash value for a higher death benefit for your heirs. Try to ensure this is a dollar-for-dollar transfer of funds.
Pay for Premiums
You may be able to apply the cash value in your policy toward your premium payments. Depending on your policy and the cost of your premiums, this can be a valuable benefit.
Take a Loan
Many insurers offer loans against the cash value that has accrued in your policy. These loans often come with moderate interest, though you may not have to repay the principal. Keep in mind that if you die before repaying a loan against your life insurance policy, the money may be deducted from the death benefit paid to your beneficiaries.
Withdraw Cash
You may be able to simply withdraw the funds to use for expenses in retirement, including long-term care. Just remember: Tapping into the cash value of your policy may reduce the amount paid to your beneficiaries when you die. This reduction in benefits may be greater than the dollar amount you withdraw.
These decisions may come with tax implications that we did not cover in this article. Because of that, as well as the many moving parts involved in both life insurance and estate planning, it’s essential that you consult with your advisor as well as tax professionals and attorneys as needed.
At Bogart Wealth, we do not sell insurance, and as fee-only fiduciaries can help you objectively review life insurance coverage. When discussing insurance policies with a broker or salesperson, make sure you understand how they are being paid and if they have any financial incentives to sell you the plan you are considering.
