Shopping for life insurance takes a lot of time and energy, forcing us to think about something we don’t want to happen. With different policy types to choose from and unfamiliar terminology, selecting the right life insurance policy for your financial situation may feel like a daunting task.
Purchasing life insurance helps protect your loved ones, as it provides them with financial support when you pass away. Life insurance will help your partner cover mortgage payments, help fund your kids’ college education, or pay for their everyday bills and debts.
Life insurance is a legally binding contract between a policy owner and an insurer.
A life insurance policy guarantees the insurer will pay a sum of money to the named beneficiaries when the insured individual dies in exchange for the premiums that the policyholder has paid during their lifetime.
It’s essential to accurately disclose the insured’s current and past health conditions or any occurring high-risk activities when making an application for a life insurance policy.
For the life insurance policy contract to be enforceable, the policyholder must pay regular premiums over time or pay a single premium upfront. When the insured individual dies, the policy’s named beneficiaries will receive the guaranteed death benefit (face value of the policy).
Also, some life insurance policies offer both death benefits and living benefits. Thus, if your policy allows living benefits, you may be able to tap into your policy’s death benefit even while you’re alive.
When you’re choosing the life insurance policy, it’s essential to consider the following:
- How much you’re willing to pay for insurance premiums
- How much cover do you need
- Decipher between a term life or permanent life policy which one suits your particular needs
- Name your beneficiaries
- Decide if you would like to include riders and customize your coverage
The life insurance coverage depends on what type of life insurance policy you choose; a permanent life insurance policy or a term life insurance policy.
The permanent life insurance policy will cover you for life as long as you pay the premiums, whereas term life insurance policies will cover you only for a preset term. Usually, term life insurance is a cheaper option, but it doesn’t offer additional benefits that permanent life insurance provides, such as the accumulation of cash value.
The crucial part of the life insurance policy is naming beneficiaries. You can designate a single beneficiary or more beneficiaries who will receive the death benefit from the life insurance company when you pass away. Keep in mind that minor children cannot be named beneficiaries.
Life insurance may sound like a financial burden, but there are numerous benefits to having life insurance for a policyholder and a beneficiary. The main perk is financial security for your loved ones, as many people suffer financial hardships after losing a family member.
Cash value insurance policy offers some tax advantages, such as tax-free dividends, tax-deferred growth of cash value, and tax-free death benefits.
Wealthy individuals tend to buy permanent life insurance to help their heirs pay the estate taxes that will be due upon their death. Some plans allow you to build savings through investments and let you even borrow money from your policy if needed.
If you have family members who depend on your income and fear that if something happens to you, they may not be able to cover living expenses, mortgage or debts, consider purchasing a life insurance policy.
Additionally, you might consider purchasing a life insurance policy to cover your funeral expenses or if you are a business owner and you would like to name your business partner as a beneficiary.
If you want to learn how to get the protection your loved ones need, we suggest you learn the basics of cash value life insurance and how to get one without breaking the bank.
In this article, we will cover:
- What is cash value life insurance?
- How does cash value life insurance work?
- Types of cash value life insurance
- How does the cash value grow?
- Advantages of cash value life insurance
- Disadvantages of cash value life insurance
- Does every life insurance policy have cash value?
- How long does it take to build cash value on life insurance?
- Build Cash Value with Infinite Banking
Cash value life insurance is a component of permanent life insurance that features a cash value accumulation component.
Cash value is a portion of your policy that acts as a savings or investment account, allowing you to withdraw or borrow against the policy with a modest interest rate.
As a policyholder, you can pull from your cash value account to cover unpaid premiums, supplement retirement income or take out personal loans throughout your life.
Each month you pay your policy premium, the money gets diverted into three main categories:
- cost of actual insurance
- insurance company’s operating costs and additional fees
- cash value component
Like many other life insurance policies, cash value life insurance includes a death benefit portion that gets paid out to your policy’s beneficiaries when you pass away.
However, the distinct feature is a cash value component. A portion of your payment funds a separate investment or savings account that earns interest or other investment gains and grows tax-deferred every month. Later on, you may withdraw cash, take out a loan or pay your premium with this money.
Several options are available, with each policy type accruing cash value differently. The main options are:
- Whole life insurance
- Variable life insurance
- Universal life insurance
- Variable universal life insurance
- Indexed universal life insurance
Remember that Term life insurance does not offer the cash value feature!
Cash value grows at a fixed rate determined by the insurer. It has fixed premiums, and your cash value is earning interest similarly to other savings accounts. It’s supposed to reach the size of the death benefit when your policy matures.
With this type of cash value insurance, you get to choose how your accumulated cash is invested. Typically, you can use the cash value to invest in various stocks or bonds instead of just having it sit in your savings account.
This type of cash value insurance builds cash value based on market interest rates and the insurer’s performance. You may have more control over your premium payment with universal life insurance. Let’s say you had a good month, and you’re able to overpay what you usually would and have the surplus go into your cash value savings account. On the other hand, if you get a little short one month, you can use your savings account to pay for your monthly premium.
The monthly premium is flexible with variable universal life insurance, meaning you can choose to divert more money into the cash value saving portion of your insurance if it suits you. You can use the cash value to invest in stocks, bonds, and mutual funds.
The downside to these policies is that they have a cap and floor on the returns that you will receive.
If you choose Indexed life insurance, your cash value will be based on a stock market index chosen by your insurers, such as the Nasdaq Composite or the S&P 500 index. However, funds do not earn a fixed interest rate, but they usually come with an interest rate guarantee.
To illustrate the case, let’s make a simplified example. If you purchase a whole life policy with a $1 million death benefit when you’re 25 years old and you pay your premium monthly, a percentage of that payment will end up in the cash value of your policy.
Thirty years later, you’ll be 55, and your cash value account will accumulate about $500,000.
As the policy offers a $1 million death benefit and you have already accumulated a cash value of $500,000, the insurance costs are supposed to cover the remaining $500,000.
Ten years later, your policy’s cash value will grow to $750,000. As you will be 65 years old now, the cost of your life insurance will be much higher. Nevertheless, since you have a significant cash value, the policy will provide only $250,000, meaning the rest of the policy’s death benefit will come from your cash value.
The numbers will vary depending on the life insurance company, the type of cash value policy, interest rates, and other factors. To profit from this, make sure your built up cash value doesn’t go back to the insurance company, as after your death, it cannot go to your heirs.
There are several distinct advantages to cash value life insurance:
- you get a guaranteed death benefit
- tax-deferred growth on the invested portion of the policy
- tax-free benefits go to your beneficiaries (depending on the size of your estate)
- take out tax-free loans against your policy
- pay your premiums with the cash value
- you may sell your policy for a life insurance settlement
- you can surrender your policy for its net cash value
- make a partial withdrawal of the cash value
- you must qualify for a policy, which usually requires a thorough health exam
- premiums are higher for permanent life insurance policies than they are for term life insurance
As previously mentioned, not every insurance policy includes a cash value component, and term life insurance is an excellent example of that.
We can’t generalize how much time it takes to build a significant cash value, as it depends on the type of policy you purchase and the life insurance company. It may take decades to build up a substantial cash value accumulation. In contrast, some policies are designed to accumulate cash value more quickly in the early years, such as New York Life’s Custom Whole Life policy.
What if we told you that you could make better use of your cash value savings account if combined with Infinite banking. The main thing we want you to understand is that if you use Infinite banking to deposit funds into your policy, you will be gaining the 4% compounded interest rate. Later on, you can use that money for any investment vehicle of your choice.
The Infinite Banking concept is a strategic method utilizing your Whole Life Insurance policy to finance your lifestyle and all other things you would typically finance through a bank. It will help you secure your financial future and bring you additional benefits.
The infinite banking concept imitates how a traditional bank operates. With this unique banking method, you won’t need to depend on a third party anymore. Rather than borrow money from a bank, you will borrow money against yourself.
Also, you can single-handedly dictate the cash flow and earn dividends through your Whole Life Insurance policy, even though you are using that money elsewhere. Thus, you will become both a creditor and a lender.
With the use of Infinite banking, you can build your wealth while borrowing and repaying the money deposited in your permanent life insurance policy’s cash value account.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life policy from a life insurance company.
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life policy.
- Tax-Free Loans taken out against your Whole Life Insurance policy’s cash value to use for your financial expenses.
If you follow these simple three steps and implement the Infinite Banking strategy, you will create your own bank and reach the unique financial goals you have wanted.
It’s safe to say that life insurance should be an essential asset to your long-term financial planning.
There are different life insurance policies on the market and options to consider, such as extra costs or plus add-ons and additional benefits, and broader coverage.
It’s crucial to find the option that will suit your estate planning goals and establish how your life insurance policy proceeds will be distributed among your beneficiaries.