A straight life insurance policy provides coverage for a lifetime, with constant premiums throughout the policy’s term. It is also known as whole life insurance. However, straight life insurance is significantly more expensive than term life insurance, allowing you to build cash value. Like a savings account, it lets you borrow against or take out a loan.
Though it may not be recommended if you seek short-term coverage – it is perfect as a long-term solution. In today’s article, we will go over all of the straight life insurance policy details.
We will cover:
- The pros and cons of straight life insurance
- What type of premium does straight life insurance have?
- Straight life insurance vs Term life insurance
- The alternative use of whole life insurance – The Infinite Banking Concept
But first…
What is straight life insurance in detail?
One of the main characteristics of straight life insurance are level premiums. They need to be paid until one’s death or until the policy is paid in full. After one’s death, the guaranteed death benefit amount is paid to the designated beneficiary or beneficiaries.
A straight life insurance policy can also accumulate cash value over time. When you pay premiums, a portion of it goes toward the upkeep of your life insurance policy, while the remainder goes to the cash value account.
Straight life insurance offers a cash value account with guaranteed minimum growth potential that can be used for various purposes. You can borrow up to the amount in the cash value account using the cash value as a loan – bank against yourself.
The pros and cons of straight life insurance
There are many advantages of this type of life insurance.
Straight life insurance provides a variety of benefits not found in other policies, in addition to a death benefit for your beneficiary and cash value for you.
Interest and Dividends
As you know, a life insurance policy isn’t equal to investment. The cash value of a straight life policy grows like one. It also gives policyholders the ability to take advantage of outside investment opportunities through policy loans.
Unlike most market-based investments, money invested in a straight life policy grows securely and predictably.
Policy Loan
A policy loan allows you to borrow from the cash value of your straight life policy. A policy loan does not require credit or bank approval because your insurance policy serves as collateral. You will be charged interest on the amount borrowed by the insurance company. Any unpaid loans, plus interest, will be deducted from your death benefit.
Policy loans allow you to save and borrow at the same time. When you save money in a straight life insurance policy, you earn interest and potential dividends on the funds in your policy over time. When you borrow against your cash value, you repay your debt and interest over time, but simultaneously you continue to earn interest on the total cash value of your account.
Tax Benefits
After-tax dollars are used to fund straight life policies. Once inside a policy, your money grows tax-free. When you withdraw funds from your policy for retirement purposes, you may be taxed on any earnings that exceed the amount you paid in policy premiums.
However, the cash value borrowed in a policy loan is not taxed, and the interest and dividends you earn grow tax-free. When your death benefit is distributed to your beneficiary, it is usually not subject to inheritance tax or income tax. This means that your beneficiary will not owe any taxes.
Asset advantages
Straight life insurance is intended to safeguard your assets. It protects against significant financial risks and liabilities in four important areas: asset searches, creditors, judgments and lawsuits.
When it comes to asset searches, the exchange of cash value, death benefits, and policy loans is a private transaction between a client and a mutual insurance company. In other words, it protects assets in your straight life insurance policy from many of the common risks that bank and investment accounts face.
Creditors rarely have access to life insurance assets. Rather than being seized as a means of collecting on delinquent loans, the cash value in your straight life policy can be used to repay any creditors you owe.
Your policy’s cash value is protected from garnishments and seizures resulting from legal judgments. In most states, the assets are still available to the policyholder after one’s death and will be passed to the designated beneficiaries.
Many states protect insurance assets from lawsuits and bankruptcy. They are distinct from corporate and business assets and are generally safeguarded as personal assets. Money in your straight life policy, in most cases, cannot be touched by outside parties, even in the event of a damaging lawsuit.
What type of premium does straight life insurance have?
The premium structure of a whole life insurance policy is referred to as straight. This terminology indicates that the plan’s premiums will be level, which means they will not increase or decrease over the course of the policy’s life.
Other permanent life insurance policies, such as adjustable life insurance, may have premiums that increase or decrease throughout the policy. These are just a few of the many policy features from which to choose when deciding on the best life insurance policy for you. For example, if you anticipate changing coverage needs in the future, a flexible plan makes sense.
Another asset of a straight life policy is a cash value account.
Straight life insurance is a type of permanent life insurance that includes a cash value account that grows over the policy’s life. A life insurance policy’s cash value is distinct from the death benefit. A portion of the premium you pay for a straight life policy is added to the account each month.
The cash value is essentially an investment account within your standard life insurance policy. Over the course of the policy, this account will grow at a guaranteed rate. Typically, the rate of return will be high enough that by the end of the policy, the cash value account will equal the value of the guaranteed death benefit. The cash value accounts can be used for various reasons, such as surrender value and loan collateral.
Surrender value
If one decides they no longer want their policy, it can be returned to the insurer and receive the cash value.
Loan collateral
An insurance company can be asked for a policy loan and one can use a cash value account as collateral. The most one could borrow is the total value of the cash value in the insurance policy.
Straight life insurance vs Term life insurance
Term life insurance is typically purchased in five-year increments, with coverage lasting up to 30 years. If you die during the term of insurance, the insurance company pays a death benefit to your beneficiary. If you live past your covered term, neither you nor your beneficiary will receive any benefits.
Because this type of insurance typically only pays out in the event of an accident or unexpected terminal illness, premiums are typically much lower than those for a straight life policy. The typical term life insurance candidate is looking to cover the costs of debt, such as college tuition or a mortgage, in the event of their sudden death. Term life insurance would make it easier for their loved ones to cover these expenses.
Term life insurance policy does not provide any cash value or other living benefits to the policyholder. However, they offer much lower monthly premium payments than straight life policies. If one predicts changing the type of policy in the future, it may be reasonable to pick convertible term life insurance. Convertible term life insurance provides you with the temporary coverage of term life insurance now. Still, it allows you to transform your coverage into a straight life policy at a later date without having to take an additional medical exam.
If one buys a standard term life insurance and, further in time, decides to change it, it may result in the cost of your premium significantly rising. The cost of premiums is determined by your health state and age.
The alternative use of straight life insurance – The Infinite Banking Concept
As mentioned before, straight life insurance allows you to take out a loan against your own death benefit. This method is also known as Infinite Banking. Getting to know this notion may be revolutionary in your retirement planning. Read on and learn how to make more responsible financial decisions, improving your financial situation.
Infinite Banking allows you to imitate how a traditional bank operates and borrows money, but without the need to depend on a third party. You will be both a creditor and a lender.
Instead of borrowing from a bank, you borrow money against yourself and single-handedly dictate cash flow while still allowing your permanent life insurance to earn dividends (money) even though you are using that money elsewhere.
In other words, you build wealth while borrowing and repaying the money held in the cash value of your permanent life insurance policy.
That being one of the most significant advantages of the whole life insurance policies, you will never have to deal with banking fees or interest rates on loans. As a policyholder, you can borrow money using your own policy’s cash value.
Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite Banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite Banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
By the process of borrowing for yourself, repaying, and so on – simply by being your own bank, you earn the financial freedom and control of your money.
Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.
Final thoughts
We hope that by the end of this article, you know everything about a straight life insurance policy. Moreover, we wish we interested you in the alternative use of it, called the Infinite Banking Concept.
You can learn more about the Infinite Banking concept and how to become your own banker by enrolling in the Wealth Nation membership program. Choose financial freedom and own your own lifestyle!