Is Whole Life Insurance Worth It
Whole life insurance is worth buying for many people. While its typically more expensive than term life insurance, as long as your premiums are paid, it offers permanent coverage with premiums that never change regardless of your health or age. It also builds cash value over time, giving you the opportunity to take out a loan from your policy to pay for medical bills or other expenses.
Put Up Cash Value As Collateral To Borrow From Your Insurer
A life insurance policy loan is a loan from the insurer in which the cash value of your policy is used as collateral. It can be used for paying medical expenses, buying a car or anything else you might need cash for. Since the insurer holds the funds to cover the loan:
- There are no underwriting requirements
- You can keep the loan outstanding for as long as you want
- Theres no credit check, and the loan doesnt appear on your credit report
However, if you pass away while the loan is outstanding, the value of the loan will be deducted from the death benefit your beneficiaries receive.
Borrowing against your policys cash value is simple and typically comes with quite low annual interest rates. But you need to either pay interest out of pocket annually or carefully monitor the size of the loan as compared to the policys cash value.
If you dont make interest payments, the interest amount is added to the outstanding loan balance. If the total size of your loan ever exceeds your policys cash value, the life insurance policy will lapse, canceling your coverage. In addition, you will likely have to pay income tax on the loan.
The Risks And Disadvantages Of Withdrawing Cash
The first thing that you are risking by withdrawing cash from your policy is a reduction of the benefit if you die, for the beneficiary that is receiving the payment. This might seem obvious, but it is definitely worth mentioning because there are different types of policies and some of them build cash value every time you make a payment on your premium. Also, keep in mind that these withdrawals arent always tax-free. There are several instances in which you will have to pay income tax on a cash withdrawal that comes from an insurance policy, and this can depend upon several things. One such example is when you take withdrawals before fifteen years have passed since you started the policy. If a withdrawal exceeds your basis in the policy then you will have to pay tax on any gains. A big financial advantage to life insurance is that the gain is the last money out. This is also known as LIFO accounting.
Another thing to keep in mind is with some universal life insurance policies you might actually have to pay a higher premium because you have withdrawn from the policy and lowered the cash value and in order to restore the amount of the death benefit, you will need to make higher premium payments for a period of time.
Cashing In Your Whole Life Insurance Policy
Before we talk about cashing in your whole life insurance policy, lets make sure were on the same page about the policys cash value.
Most whole life policies come with two different portions. One is the death benefit. This is a set amount that you get upon death, or, in some cases, you can get in case of a terminal diagnosis.
The second portion of this policy is the cash value. This is what makes universal life insurance policies so much more expensive than term policies. Youre paying extra in premiums each month. Then the insurance company invests the additional premium, and you get some of the returns.
The cash value of your policy builds over time. If youve only been paying premiums for a few years, it probably wont amount to much money. But if youve been paying on the policy for a couple of decades, you could have a hefty cash value available.
When Should You Cancel A Life Insurance Policy
Itâs important to have life insurance coverage if you have dependents or shared debts, but there are legitimate reasons to consider canceling your policy. For example, you might:
Be unable to afford the policy
Find more affordable coverage elsewhere
No longer need a policy
Want to cash out the cash value amount
What To Know When Buying Someone Elses Life Insurance Policy
The process of buying a life insurance policy that belongs to someone else is pretty much the same as if you were buying one for yourself. Obviously, the person from whom you want to buy the policy has to be willing to sell it to you. But if youre both in agreement, your first step is to go to a financial advisor who can facilitate the sale for you.
As mentioned above, legislation in every province except Quebec prohibits the sale of life insurance policies to third parties. But this is merely to prevent the trafficking of life insurance policies, which, Murray explains, is when a person or a company specializes in buying multiple policies, securitizing them and then reselling them for commercial purposesusually for terms that arent in the policyholders best interest.
You can, however, sell your policy to virtually anyone, so long as both parties are consenting. A parent might sell their policy to their children, or one spouse to another. A businessperson might sell to their partner, says Murray.
How To Cancel Your Term Life Insurance Policy
There are a few ways to cancel a term life insurance policy.
1. Stop paying premiums. If you miss a premium payment and donât pay it within the grace periodâthe 30-31 days after your due date during which you still have coverageâyour insurance is canceled.Â
2. Write a letter. Provide written notice to your insurer that youâd like to cancel your policy. Some policies detail in their contracts that issuing a stop-payment order for your premiums is considered written notice, but you can also write a very simple letter.
Hereâs an example of a term life insurance policy cancellation letter:
Iâm writing to cancel my policy, effective DATE.
My policy number is POLICY NUMBER.
Please return any unused premiums to ADDRESS.
Check your providerâs website tooâsome may have a way to submit notice online.
3. Call your provider. Most life insurers can cancel your policy over the phone, or at least start the process for you. Have your policy number handy and an insurance agent should be able to guide you through the steps.
No matter how you choose to cancel your policy, thereâs no penalty or fee for ending term life insurance coverage.
How Does It Work As An Investment
While whole life insurance policies act as an investment vehicle of sorts because of the cash value they accrue, you shouldnt view any type of life insurance as an investment. True investments are heavily regulated and have safeguards in place to protect investors. While life insurance is also heavily regulated, its regulations have little to do with the financial sector.
Rather, you should view whole life insurance as a safeguard that protects your loved ones from experiencing a financial burden when you pass. The death benefit can help ensure they dont have to dip into their savings or investments to handle your final arrangements.
What Can You Do With A Cash Value Policy
The value of a cash value policy is in what you can do with it once the cash value reaches a certain amount. Note: it takes a long time to build up the cash value. Most of the growth happens when youâve had the policy for two or three decades, so if you surrender the policy within the first 10 years, itâs unlikely that your cash value will be greater than the total premiums you have paid.
Once you’ve accumulated enough cash value, you can:
Take out a policy loan.
Usually, you’ll get lower interest rates than other types of loans against the cash value. But keep in mind that if you die before your loans are repaid , the unpaid loan will be subject to tax.
Use the cash value to pay premiums.
This can be a great way to avoid an unwanted policy surrender due to unpaid premiums, but usually you can only do this after at least one year of owning the policy. If you deplete the entirety of the cash value to pay your premiums, however, your policy will lapse.
Surrender the policy and withdraw the cash if you no longer need life insurance.
A few caveats: if you surrender the policy, any cash profit you’ve made is subject to tax. And doing so during the first two to three years may mean you don’t get any of the cash value or paying high administrative fees.
â Read more about the types of cash value policies and how the cash value can be used.
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Withdrawals From A Life Insurance Policy
Depending on your policy contract, you may be able to withdraw some of the cash value that has accumulated in your life insurance policy. The amount you withdraw may have tax implications for you and will also reduce the death benefit your beneficiaries receive. Research all the implications of making a withdrawal prior to doing so.
Find The Cheapest Insurance Quotes In Your Area
And what if youre in a situation where you no longer need life insurance? If you have very little debt and no dependents, you may not need to maintain a policy at all. In this case, you shouldnt keep paying for a whole life insurance policy unless its part of a well-considered estate plan. If you dont need the policy anymore, call your insurance company to cancel it. Again, you can take the cash benefit your pocket and invest it for the future.
Whole life insurance policies are the best option for some people, especially those who will always have dependents due to disabilities and the like. But if youre paying for an expensive policy you dont really need, cashing out may be the best option, even if you have to pay fees and taxes. Just be sure you know exactly what those expenses will be before you initiate the process.
Finally, whole life and universal life policies can be extremely complicated. Any decision you make may have tax implications. The key is to seek the advice of a qualified life insurance specialist before making a decision.
Pay Life Insurance Premiums With Cash Value
Some life insurance plans allow you to tap into the cash value of the account to pay for the premiums.13 This can be particularly helpful if new and unexpected expenses arise in other parts of ones life. This may impact the value of the death benefit over time, so we advise you to consider your options. Not all insurance companies allow this, so we recommend you chat with an agent.
Extend Your Current Term Policy: The Pros And Cons
Assuming the coverage amount on your current term policy is still right for you, your policys guaranteed renewability clause can be extended . The insurance company, however, can and typically will raise your premium.
- Pros: One reason some people consider taking advantage of a term policys guaranteed renewability feature is because it may be the only way to continue having life insurance due to a change in health. If someone has been diagnosed with a terminal or life-shortening illness, they may not qualify for a new policy that offers a substantial death benefit. For people who find themselves in this difficult situation, extending a term policy can sometimes be the best way to provide financial confidence for their family.
- Cons: As noted, the insurance company will typically raise premiums once the term is expired. And as the renewal is year-to-year, the premiums will generally increase more every year after. For many people, this is only viable for a few years at most.
Surrender Life Insurance Policy For Cash Value
If there comes a time when you no longer want or need your life insurance policy, there is a possibility that you can surrender it for cash value. If your policy has accrued cash value over the years, surrendering that policy means that you will stop paying premiums, forfeit the death benefit, and receive the cash surrender value that has accrued in the policy, less any administrative fees and applicable surrender charges.
Term Vs Whole Life Insurance: Which Is Best
10 Minute Read | August 25, 2021
Have you ever planned a family getaway? You spend months researching and booking places to stay, places to eat, places to gothe whole nine yards. But you know what you cant book? The seven-day forecast. Even after months of planning your vacation, theres no way to guarantee it wont rain.
But thats the funny thing about lifeno matter how much we plan, sometimes it rains. Thats why its so important to get things in place that we can controllike life insurance.
Okay, we know its not the most fun topic to talk about, but boy is it an important one! If someone relies on your paycheck, you need to have life insurance. And when you boil things down, you really only have two options when it comes to life insuranceterm vs. whole life. But is term or whole life insurance better? One is a safe plan that helps protect your family, and the other one is, well, a total rip-off. Lets go over the differences between term and whole life now.
How To Cancel Your Whole Life Insurance Policy
Canceling a whole life insurance policy takes more than just stopping payments. Each policy has slightly different forfeiture rules, but generally, you should start with a call to your insurer. Your options will depend on how long youâve owned the policy and your insurance companyâs rules, but there are usually three choices:
1. Cash out the policy.Â
Whole life insurance has a cash value account, which earns interest over time. Every policy has a cash surrender value, which is the cash value amount minus fees and penalties. Penalties for cashing out apply during the surrender period, which can last a decade or more. Interest earnings are also taxed as income if you cash out.
2. Let it lapse.
Some insurers will automatically cash out your whole life policy and let the coverage lapse if you stop making payments. Other types of permanent insurance, like universal life insurance, automatically use your cash value to fund your premiums if you stop paying. This depletes the payout youâd get from canceling the policy, and when the cash runs out, your policy lapses.Â
In either scenario, if your whole life policy lapses, you can face surrender charges and taxes.
3. Opt for reduced paid-up insurance.Â
This option comes with the fewest fees. A reduced paid-up option allows you to stop paying premiums in exchange for a lower death benefit. The reduced benefit is based on the premiums youâve already paid, and coverage lasts for life.Â
Types Of Term Life Insurance
Level term is the most common form of term life insurance. Its the type that offers premiums that dont change during the years of the policy length that you choose. Other types are:
Annual renewable term: With this type your premiums goes up every year, although you choose a period of insurability that guarantees you wont have to reapply. It may be good for people who want to close a short gap in life insurance, but a short level-term policy is likely a better choice.
Decreasing term life insurance: Here your premiums stay the same over the length of the policy but the death benefit decreases steadily over time. Mortgage life insurance is a form of decreasing term life. The payout is tied to the declining balance of the mortgage, and the beneficiary is the mortgage lender, not your family. Regular term life insurance is a better bet because your family receives the payout and can use it for any expense they choose.
Return of premium term life insurance: This policy type promises to refund the premiums you paid in if you outlive the policy. As you can imagine, the refund feature makes the policy more expensive. Return of premium term life is available from companies such as AAA Life Insurance, State Farm Life and Vantis Life.
Use The Policy As Collateral With A Third
Another way clients can get cash is to approach a bank or credit union.
Like before, the life insurance policy is assigned as collateral to secure a line of credit or a loanbut the lender is external.
While there is no taxable income, clients still have to pay interest, which can be higher than typical bank loansthe rate depends on the lender. And clients must get approved, so lenders will assess creditworthiness, as well as the collateral.
Schochet adds that, with WL, the bank loan generally cannot exceed 90% of the cash value; with UL, its 75% if its in guaranteed investments like GICs .
Do You Have To Pay Back The Loan
Unlike bank loans or , you do not have to pay back the loan you take when borrowing from a permanent life insurance policy. But when you borrow the money based on your cash value, the amount you borrow may reduce the death benefit from your policy’s life insurance portion.
If you do not pay the loan back, and the interest combined with the amount borrowed starts to exceed the cash value, you could put your life insurance policy at risk. This policy risk can arise more quickly than you think.
% Intro Apr Credit Card
Depending on why you need the money, a 0% intro APR credit card is another alternative to pulling cash from a life insurance policy.
Some cards provide promotional 0% intro APR offers for transferring balances from high-interest credit cards, for purchases, or for both. During the promotional period, interest charges won’t accumulate as long as you make on-time payments for at least the minimum amount due.
A 0% APR credit card may be a better option than a low-interest personal loan if you’re sure you can pay off the credit card balance before the promotional period ends and the interest rate increases.
Cards with 0% intro APR promotions often require good credit. Before you apply, do your research so you apply for a card you’re likely to qualify for. Experian CreditMatch can provide you credit cards that fit your credit profile when you sign up for free.
Cost And Premiums Comparison
Term life insurance costs significantly less than whole life insurance. Since they provide coverage for a limited time and limit the age at which you can obtain coverage, most term policies expire before a death benefit ever comes due. For that reason, term life insurance represents a lower risk to insurers compared to whole life policies, which makes them willing to sell term life for lower premiums. In fact, a whole life policy can cost 10 times more per month than the same amount of coverage in a whole life policy. For example, Investopedia estimates that for a healthy 35-year-old non-smoker, a 20-year, level-premium term life policy with a $250,000 face value would cost $20 to $30 a month, compared to $200 to $300 a month for an equivalent whole life policy.
Types Of Cash Value Life Insurance Policies
Cash value life insurance policies are typically permanent, meaning you have coverage for the entirety of your life so long as premiums are paid. Some of the most common types of cash value life insurance policies are:
|Based upon performance of an index, such as the S&P 500.|
|Variable Life Insurance||Cash value can be invested in certain aggregated portfolios offered by the insurer which are similar to mutual funds.|
Term life insurance policies have no cash surrender value. This means that if you decide to give up your coverage to the insurer, you wont receive anything in return. On the other hand, its also the reason why term life insurance is several times less expensive than cash value life insurance.
The only reason youd get money back from an insurer with a term life insurance policy is if you have a return of premium rider. This rider adds to the cost of your premiums but ensures that youll receive a portion or the sum of premiums paid if you live past the term of the policy.
Pay Your Premiums With The Cash Value
Variable and universal life insurance policies are often favored because they allow you to use the policys cash value to pay premiums. This strategy will only work for a short period of time if you start while the cash value is too small or if interest rates are low. In addition, you have to carefully monitor the cash value to make sure it doesnt drop too far, or you may lose your coverage. But if you have a fairly large cash value with consistent returns, you can keep coverage in place for years at little to no additional cost.
For example, say your annual premium is $5,000 and you have $100,000 in cash value. You would just need the policys cash value to return a net 2.5% interest annually to cut your premium payments in half while maintaining the full cash value.
Whole life insurance policies typically dont let you pay premiums using the policys cash value except if you convert to a paid-up policy. Not all insurers offer this option but, with a paid-up life insurance policy, the cash value is large enough that you can stop paying premiums out of pocket. You use the cash value to pay premiums. The downside to paid-up whole life insurance policies is that each premium payment is deducted from the policys death benefit. In addition, less cash value is available for other purposes, such as a policy loan.
Voluntary And Group Term Life Insurance
Voluntary term life insurance refers to the extra coverage that employees can opt-in to purchase, hence the “voluntary” title. Group life insurance is usually offered through an employer as part of a compensation and benefits package. Group and voluntary life insurance is usually term life as opposed to permanent life insurance.
Your employer might suggest a certain amount of coverage at no cost to allow employees to take advantage of a discounted group rate to get additional coverage. While group term life insurance comes at a discount, the policies tend to be less customizable and often are not transferable, meaning that the coverage ceases if you change employers.
Given the median tenure for employees at a particular job is less than five years, you’ll likely move to a new company within the term of coverage. It’s essential to evaluate the options available and terms of the policy before purchasing group coverage.
Should Clients Cash Out An Insurance Policy
Clients who need access to cash will come to you for solutions
- May 6, 2016September 10, 2018
Clients who need access to cash will come to you for solutions.
If they have permanent life insurance, one option is cashing out the policy. But while it wont affect future insurability, theres a tax hit if a client surrenders his policy prior to death. Thats because permanent insurance policies have an investment component thats tax-sheltered. Pulling out cash early means the client will have to pay tax on that income.
Elli Schochet, an associate at Al G. Brown & Associates in Toronto, says the amount of tax clients have to pay depends on the ACB of the policy.
The ACB is determined through a complex CRA calculation, but in short, its made of the premiums put into the policy, less the net cost of pure insurance.
If the ACB is $20,000, and theres $100,000 built up in a policy, the client would pay tax on the remaining $80,000 .
And how long a client has had a policy makes a difference. The best time to cancel and have the lowest tax impact is probably within the first few years, says Schochet. The longer the policy has been in place, the higher the percentage of the cash value thats taxable.
While the tax impact may be lower early on, Ashley Rodrigues, director, Insurance Solutions at BMO Insurance in Toronto, says it usually isnt appropriate to cash out over the short term .
Here are a few alternatives for cash-strapped clients with permanent life policies.