Is It A Good Or Bad Idea
Traditional;life insurance was designed to provide beneficiary death benefits in the event of the insured person’s death. However, there are now some life insurance products available that include a savings or investment component.
Some insurance agents tout the benefits of life insurance with investment components. Those benefits include being able to borrow money from the cash value of the policy after you’ve paid premiums. Two types of life insurance policies that provide cash value are whole life insurance and universal life insurance. Check your life insurance policy to see whether it includes a loan provision.
Being able to use your policy if you need an emergency loan sounds great. But be aware of the pros and cons of policy loans to ensure that you don’t put your coverage and paid premiums at risk.
Do All Va Life Insurance Policies Pay Dividends
No. Only these policies pay dividends:
- National Service Life Insurance
- Veterans Special Life Insurance
- Veterans Reopened Insurance
- United States Government Life Insurance
Your policy pays dividends only if it begins with V, RS, W, J, JR, JS, or K.
Note: You may have heard rumors about special dividends for other life insurance plans. These rumors are false. We dont pay dividends on Servicemembers’ Group Life Insurance or Veterans’ Group Life Insurance coverage. Learn more about the special dividend rumors.
Is The Cost Of Whole Life Insurance Worth It
If you want permanent coverage but are on the fence about the high cost of whole life insurance, you may want to get quotes for a guaranteed universal policy. You can compare this to a quote for whole life insurance. You should also evaluate the guaranteed returns of the whole life insurance policy against an estimate of your returns if you invested the difference in cost between the two policies. Just make sure that you:
- Compare prices between a whole life insurance policy and guaranteed universal life insurance policy, not a term life insurance policy. If you dont need permanent life insurance, dont buy it. If you do need permanent life insurance, it will cost more than term coverage and a guaranteed universal policy is the closest way to approximate your cost of coverage.
- Use conservative estimates for your investment returns through a brokerage account. Some critics of whole life insurance compare using 8% to 10% annual expected returns, which are not realistic. In addition, these returns are not guaranteed and you can lose the money you invest. Whole life insurance guaranteed returns are quite moderate, but they are guaranteed.
- Consider capital gains taxes. Investment gains in a brokerage account can be taxed at up to 20%.
Read Also: Trustage Reviews
Make A Partial Withdrawal Of The Cash Value
If you dont want to get rid of your life insurance coverage entirely but have fewer financial obligations, you can also withdraw a portion of the cash value. This provides you cash while reducing the life insurance policys death benefit. For example, if your children have done well in their careers, you may be less concerned about passing on an inheritance but still want some coverage for your spouse.
How a partial withdrawal works can vary based upon the life insurance policy:
- Variable and universal life insurance policies – A partial withdrawal is similar to receiving a portion of the death benefit early, as the payout to beneficiaries is reduced by the amount you withdraw. So long as you dont withdraw more money than youve paid in premiums, there are no taxes on the partial withdrawal. If you withdraw more than youve paid, it will be taxed as income.
- Whole life insurance policies – We typically dont recommend a partial withdrawal if you have a whole life insurance policy, as the insurer will often reduce your death benefit by a greater amount than you withdraw. You might want to consider a life insurance settlement or simply surrender the policy if its too large.
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.
You May Like: Does Parking Tickets Affect Insurance
Policy Dividends Used To Purchase Paid
Although policy dividends are not guaranteed, using available dividends to purchase paid-up additions can, over time, have a significant, positive impact on both the death benefit and cash value of a whole life policy. The diagram illustrates how this might work, in a hypothetical life insurance policy.
The Best Compound Interest Accounts
A number of cash and cash equivalent accounts feature compound interest. Bank savings accounts, mutual fund and brokerage account money market accounts, and life insurance cash accounts typically accrue compound interest.
Corporate and government bonds, on the other hand, often pay simple interest, although sometimes these products will have dividend reinvestment programs which enable compounding.
Mutual funds, whether they invest in equities , or fixed-income , allow reinvestment of both dividends and capital gains if they are open-ended, enabling compounding.
A distinction should be made between mutual funds, whether of the equity or fixed-income variety, and cash accounts. While mutual funds feature compounding, unlike cash accounts, any principal invested in these funds is at risk, whereas money held in cash accounts generally doesnt place your principal at risk .
Using Cash Value To Pay The Premiums
If you build up enough money in your cash value account, you may be able to use your cash value to cover premium payments, depending on the policy. If youre struggling to make the payments, this option could provide some relief so that you can keep the life insurance in force.
If you drain all the cash value from the account, the policy could lapse, so be aware of your cash value level.
Talk with your insurance company to find out their rules for using cash value toward your premiums.
Considerations Before Buying Life Insurance
Research policy options and company reviewsbecause life insurance policies are a major expense and commitment, it’s critical to do proper due diligence to make sure the company you choose has a solid track record and financial strength, given that your heirs may not receive any death benefit for many decades into the future. Investopedia has evaluated scores of companies that offer all different types of insurance and rated the best in numerous categories.
Life insurance can be a prudent financial tool to hedge your bets and provide protection for your loved ones in case of death should you die while the policy is in force. However, there are situations in which it makes less sensesuch as buying too much or insuring those whose income doesn’t need to be replaced. So, it’s important to consider the following:
What expenses couldn’t be met if you died? If your spouse has a strong income and you don’t have any children, maybe it’s not warranted. It is still important to consider the impact of your potential death on a spouse and consider how much financial support they would need to grieve without worrying about returning to work before theyre ready. However, if both spouses’ income is necessary to maintain a desired lifestyle or meet financial commitments, then both spouses may need separate life insurance coverage.
Recommended Reading: Does Dental Insurance Cover Veneers
When Does Whole Life Make Sense
Given the expense of whole life insurance and that many people do not need insurance for their entire lives, it is often not the ideal product to purchase. However, there are some specific situations where a form of permanent life insurance makes sense.
Funding a trust: Permanent life insurance can be used to fund a trust that will support children after you die.
Paying estate taxes: For those with estates larger than the current estate tax exemption, which is $11,580,000 in 2020, permanent life insurance may make sense to help heirs pay any estate taxes due when you pass away. Some states have lower estate tax limits, so it may make sense for folks living in those states as well.
Funding a buy-sell agreement: If youre an owner of a business with a partner, you might consider whole life insurance to fund the purchase of each others shares in the business at death.
Naming Your Estate As The Beneficiary
If you name your estate as the beneficiary. The estate will distribute the death benefits according to the terms of your will. The proceeds of the death benefit will become part of your estate and will be subject to estate taxes. If the death benefit is part of your estate, creditors may claim the death benefit to pay for your outstanding debts.
If you name your estate as your beneficiary:
- the death benefit will become part of your estate
- the death benefit will be distributed according to the terms of your will
- the money will be subject to taxes when your estate is settled
Don’t Miss: Do Parking Tickets Affect Car Insurance
There Are No Qualifiers For A Policy Loan
Unlike other loans, you don’t need to qualify to borrow against your life insurance policy. There’s no credit check, so the loan doesn’t appear on your credit report. And you don’t have to provide proof of income. At most, you’ll just have to prove your identity and that you’re requesting the loan.
Since there are no checks or qualifications, life insurance collateral loans can be a great solution if you need money quickly, such as for an emergency medical expense. Alternatively, they can be used as a stop-gap if you’re applying for a loan elsewhere, taking a long time to be approved.
What Are The Pros And Cons Of Whole Life Insurance
Whole life insurance is the simplest form of permanent life insurance, with guarantees for the death benefit amount, premium costs, and cash value growth.;Compared to universal life;, whole life typically offers more guarantees but less payment flexibility.;Compared to term life, whole life offers life-long coverage and cash value; but the cost for a given level of death benefit is typically higher.
How Do You Determine The Death Benefit Payout
If your loved one passes away, you may be wondering how much their life insurance payout will be. Many insurance experts recommend purchasing a life insurance policy with a death benefit equaling around seven to 10 times your annual salary. However, not everyone purchases the same amount of life insurance. The easiest way to determine the death benefit payout is to reference the policy documents.
The Life Insurance Policy Loan A Cash
While the origin of the cash value of permanent life insurance was as a non-forfeiture value for the policyowner a share of the insurance company reserves associated with the policy that couldnt be forfeited even if the policy lapsed the existence of this asset is also what makes it possible to obtain a life insurance policy loan.
In fact, the reality is that a life insurance policy loan is really nothing more than a personal loan from the insurance company to the policyowner for which the cash value of the life insurance policy serves as collateral. And the insurance company can confidently make the loan to the policyowner, at a relatively favorable rate of interest, because it knows that if the loan is unpaid the collateral can be foreclosed upon and liquidated to repay the loan. Because the life insurance company controls the cash value that is serving as collateral to the loan in the first place!
In turn, the reality that the cash value of life insurance serves as collateral for the loan also explains why a growing loan can cause a life insurance policy to lapse because ultimately, the insurance company doesnt want to take any risk that the loan could ever be underwater . Thus, as the value of the loan approaches the cash value of the life insurance policy, the insurance company does in fact compel the liquidation of the collateral to repay the loan even if that unfortunately causes the life insurance policy to lapse in the process!
Read Also: Is Trustage Life Insurance Any Good
How Whole Life Insurance Works As An Investment
When you pay whole life insurance premiums, a portion goes towards the cost of insurance, some is put towards sales and administrative fees, and the rest goes towards the policys cash value. In the early years, fees and the cost of insurance use up the majority of your premium but, over time, an increasing amount is contributed towards the cash value.
The cash value is basically an investment account inside your whole life insurance policy that grows at a guaranteed rate over time. The guaranteed rate of return is typically enough that your cash value should equal the policys death benefit when you turn 100, assuming you dont make withdrawals. A simple way to think of your policys cash value is that its the amount of money you would get in return for giving up the policy to the insurer.
During the first 10 to 20 years of coverage, a whole life insurance policys cash value is quite small, due to fees and the cost of coverage. Therefore, we wouldnt recommend whole life insurance as an investment if youre older, as you may not live long enough to see good returns and would save money with a guaranteed universal policy.
If you purchase whole life insurance from a mutual insurance company, you may receive dividends as your cash value grows. Mutual insurers are owned by their policyholders, so profits are redistributed as dividends annually.
Option : Deposit Dividend Earn Interest
The interest earned on this kind of account isn’t taxable. Its different from Option 3 in these ways:
- It isnt available to term insurance policyholders.
- If you miss a premium payment, we wont automatically withdraw money from this account to pay your premium.
- If you want to pay your premium, youll need to call us at ;or send us a written request.
Recommended Reading: Who Is The Best Home Insurance Company
How Does A Life Insurance Policy Loan Work
Life insurance policy loans are available on life insurance policies where there is sufficient cash value to borrow against. The available loan will be a percentage of the cash value. ;You must pay interest on the policy loan.
To initiate a policy loan, youll need to contact your life insurance company. Before taking out a policy loan, find out what will happen to the components of your policy after the loan. You can do this by requesting an in-force illustration that will reflect the policy loan based on your planswhether youll borrow more money, repay the loan or maintain the loan.
Be sure the in-force illustration also reflects whether you will be paying interest on the loan out-of-pocket or if you will be borrowing interest as well.
And review the following terms of the loan.
The insurance company will charge interest in advance or in arrears:
; Interest in advance.The insurance company charges interest for the full year. This assumes that the loan is continued for that policy year. If the loan is taken out in the middle of a policy year, interest is charged for the remainder of the policy year at the time the loan is taken out. If a loan repayment is made during the policy year, the insurance company will typically not provide any credit or refund on the interest paid in advance.
Whole life policies may also have an optional automatic premium loan provision. If you dont pay your premium due, it is automatically deducted from the cash value through a policy loan.
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.
Also Check: Does State Farm Carry Pet Insurance
Understanding Net Borrowing Rates And Insurance Policy Loan Spread
An important caveat to the dynamics of life insurance policy loans and the fact that if the value of the loan reaches the total cash value of a policy it can cause the life insurance to lapse is that even if no payments are being made on the loan and its balance compounds , the cash value as the underlying collateral of the loan continues to grow as well.
After all, the life insurance policy loan is still nothing more than a personal loan from the insurance company, using the asset value of the life insurance as collateral. Which means the cash value itself is still an asset of the policyowner, and remains invested with the potential to grow just as the value of the underlying real estate can continue to grow, even though theres a mortgage against the property.
But in the context of life insurance where the value of the asset can grow almost in line with the balance of the loan, even when no payments are made on a life insurance policy loan it can take a significant amount of time for the compounding loan balance to erode the net equity of the policy and ever trigger a lapse of the coverage. Or viewed another way, determining how long it will be until a life insurance loan causes the policy to lapse is based on the net borrowing cost , not just the stated borrowing rate on the loan.