As many know, life insurance is financial protection for your family and loved ones following your death. But did you know that some life insurance policies include something called a cash value that grows over time? And did you know that some of those policies allow you to access that cash value while you’re living?
Permanent life insurance policies are life-long and have cash value that increases over time. These permanent policies contain a death benefit (or face amount), which is the amount paid at the time of death, and a cash value that grows over time on a tax-deferred basis, similar to retirement or tuition savings plans.
How does cash value work?
The type of permanent policy you have will determine the way your cash value accumulates over time. While certain permanent policies also allow you to put extra money into the policy to increase your cash value, keep in mind that there are limits to how high your cash value can get in relation to your death benefit. If a policy is over-funded, it is deemed an investment and it loses its tax advantages. But don’t worry—your insurer will be monitoring the policy to make sure it’s within the guidelines.
Additionally, many permanent policies allow you to pull from your cash value at any time for any reason, whether you’re using it for a down payment on a home, paying for your child’s education or providing additional income for your retirement. You may even be able to delay paying premiums by using the cash value to continue your life insurance payments and maintain your current life insurance protection.
What happens to the cash value after death?
When a death claim is filed, it terminates the contract and stops the cash value from continuing to grow. Then, depending on the type of policy and death benefit, the cash value may or may not be paid in addition to the death benefit. So, it’s best to consult with your independent agent to learn how a specific permanent life insurance policy handles cash value after death.
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Types of permanent life insurance
There are four types of permanent life insurance: whole life, universal life, variable life and variable universal life. Talk to an independent agent to help you determine which one is best for you.
Whole life.
Whole life is your simplest option with virtually no risk. The premiums do not change with whole life policies. Also, the death benefit and cash value amounts are guaranteed. When you purchase whole life, you will receive a chart with predetermined cash value amounts for each year of your policy. So, if you wanted to pull from your cash value, but didn’t know how much you had to pull from, you would take a look at this chart to determine what your cash value is at that particular time in your contract.
Universal life.
Universal life (UL) insurance policies are a combination of a death benefit and a savings account with interest. Today, typical interest rates for UL policies are around 3-4% and are reviewed periodically and adjusted as needed. There’s also a minimum interest rate stated in the contract. UL offers the flexibility of adjustable premiums, meaning you can pay less at times when you are on a tight budget or pay more when you have extra cash. The policy comes with a guaranteed minimum death benefit, if your premium payments can sustain it, and a greater cash value potential due to the policy’s interest accumulation as well as the ability to increase your premiums.
Variable life.
Variable life (VL) has fixed premium payments. However, these fixed premiums are allocated among investment options, similar to mutual funds. Your cash value depends on the performance of these investments. This shifts the investment risks from the insurance company over to you. While there’s the potential for you to achieve a much higher cash value, there’s also the risk that you could lose some or all of your cash value, too.
Variable universal life.
Variable universal life (VUL) combines the investment side of VL with the flexibility of adjustable premium payments in UL. You can allocate your funds, tax-free, over investment options with different degrees of risk and reward. If your needs change after purchasing the policy, you can change the amount of coverage you receive without creating a new contract. If you are a little tight on money, you may use your cash value to cover the policy’s expenses. On the contrary, you may also increase your premiums or make a lump-sum payment to help increase your cash value. Like variable life, this is also a policy with more risk and more potential reward than whole life. But it offers flexibility should your needs change over time.
Ask your independent Grange Life agent about term and permanent policies that fit your needs.
To learn more about life insurance and to calculate how much coverage you need, we recommend visiting www.lifehappens.org and talking with your independent agent.
This article is not intended to be used, nor can it be used, by any taxpayer for the purpose of avoiding U.S. federal, state or local tax penalties. It is written to support the promotion of the matter addressed here. Grange Life Insurance Company does not provide tax, accounting or legal advice. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor.
All life policies are underwritten by Grange Life Insurance Company, Columbus OH, or Kansas City Life, Kansas City, MO, and are subject to underwriting approval. Not available in all states.