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Cash-value Life Insurance
(or Permanent Life Insurance) -- Part VIII
Insurance is an extremely important financial vehicle if you have a family to provide for. A death, poor health, disability, fire, theft, etc. can wipe out a lifetime of savings. Although all insurance is relevant for retirement, Cash-Value Life Insurance is of particular interest in this course.
Cash-value life insurance can not only provide life insurance protection, but it can also help you build future savings for your retirement.
By definition, cash-value life insurance is a combination of a death benefit (money paid to beneficiaries after the policy holder dies) coupled with a savings or investment account. It's a pricier form of life insurance since you get an insurance policy and a savings vehicle within one instrument.
True to its name, cash value live insurance allows you to borrow and withdraw
cash against the cash value of your policy should you need
to.
In other words, you can benefit from cash you are accumulating in the policy while you are living by:
- Borrowing up to the full amount of the cash value. The interest on this "loan" is usually about 2-3% points above prime, which is much better than you would pay on a credit card or through other borrowings. If you die when the loan is outstanding, the amount of the loan (including interest owed) is deducted from the money paid to your beneficiaries.
- Using the cash reserve to pay future policy premiums.
- Converting your accumulated cash into an annuity that will pay you a guaranteed monthly income for life. (Only available when you are able retirement age)
The four key types of Cash Value Life Insurance are:
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Universal Variable Life Insurance
Let's take a closer look at each now.
A. Whole Life Insurance
Of all four forms of cash-value life insurance, this is the most conservative policy. Since there is a guaranteed annual premium and minimum guaranteed cash value return and death benefit, whole life is best for conservative investors who find it hard to save. With Whole Life, also called Permanent Insurance or Straight Life Insurance, you lock in an interest rate when you purchase your policy and this rate is fixed for life. This policy remains active for your entire life as long as you pay your premiums.
Premiums tend to be high since part of this payment goes towards your coverage and related administrative costs. The remaining premium balance (after these costs) builds up as cash value that earns interest over time.
There are several ways to pay your Whole Life premiums:
- Modified life: charges lower premiums when you are young and higher when you get older. This is easier on the wallets of young people but your cash does not accumulate as quickly as it would in a traditional policy.
- Limited-payment life: requires higher premiums for a finite number of years. Premiums are higher, but cash builds up quicker.
- Single-premium life: is paid in a lump sum up front. Be advised: if you want to withdraw money from the policy, be careful to avoid adverse tax consequences that may arise.
B. Universal Life Insurance
Universal policies are typically more flexible and include monthly renewable term insurance plus an investment component. This type of insurance includes minimum guaranteed cash values, death benefits, and premiums. The cash value of your policy will vary according to the fluctuating rates of the market. Universal life is best for people who need flexibility in paying their premiums, especially in the early years.
Holders can pay premiums of any amount (above specified minimums) at any time. The investment returns reflect short-term money market rates.
Insurance companies set a rate of return for the policy for a year and then readjust it depending on interest rate levels. The amount of protection can be altered to meet your insurance needs at any time.
HerTip: Term Insurance needs to be renewed consistently. While you are young, the prices tend to be fairly cheap, but they may rise significantly as you get older. In contrast, Permanent Life has the same premium, year after year.
C. Variable Life Insurance
Variable Life Insurance is best for people who are more market savvy and can handle risk. With variable life insurance, it is the policyholder, and not the issuing insurance company, who determines how the cash value of the account is invested. Variable life insurance offers the fewest guarantees, but the greatest potential for cash value increases. This type of insurance has fixed guaranteed annual premiums and a minimum guaranteed death benefit.
Variable Life policies are higher risk than the other policies we've talked about, but do offer the chance of higher returns. In this case, the cash balance is invested in stocks, bonds or money market funds as the policyholder sees fit. The value of your policy and the death benefit move with your investment results. The death benefit will never fall to less than the original amount of coverage stated in your contract.
When you purchase a variable life insurance policy, you are making an investment and should treat it as one. The agent who sells you the policy should be a registered representative of a broker-dealer and give you a prospectus of the plan you'll be investing in.
D. Variable Universal Life
As the name suggests, Variable Universal Life insurance is a combination of Universal Life and Variable Life Insurance. It is the most flexible policy and offers potentially higher cash values.
In this case, subscribers can adjust both their premiums and their death benefit. As with a straight variable plan, the policyholder is responsible for making investment decisions
Conclusion
The bottom line: GET INVOLVED in your retirement planning. No business is too small, and no woman is too wealthy to overlook retirement planning.
Take advantage of what is offered to you by your employer and discuss your options carefully with your registered financial representative.
If you are currently or ever have been married, don't forget about your spouse or ex-spouse's retirement fund - it could play an important role in planning for your retirement.
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