We hear it all the time "never buy cash value life insurance, it's just not worth the money." Some consultants insist that creating an emergency fund that is supported by cheap term life insurance makes much better financial sense.
What they neglect to point out, however, is that when you are starting a family and creating debt that results from mortgages and car loans, it can take substantial time to put aside a large emergency fund. What happens if you need low-cost loans in the meantime? And what happens if you, the primary earner in the household, die unexpectedly? This is when cash value life insurance makes a lot of financial sense.
Universal Life Insurance
By using a Universal Life (UL) product, the consumer can save for a rainy day or supplement their retirement while also financially protecting their family in the event of death. Universal Life insurance is an insurance hybrid that uses Term insurance with a cash account attached to it.
The UL was originally designed as a more affordable way to purchase permanent insurance and have the flexibility to change as the policyholder's needs might change during their lifetime. The policyholder pays more than the cost of insurance during the early years of the policy, and the overage is directed to a cash account that earns tax-deferred interest. In the later years, when the cost of insurance may be more than the periodic premium, the premium shortfall is made up using the funds in the cash account thus, keeping the policy in force for the life of the insured.
Index or Variable Universal Life
Not long after the UL hit the market with huge success, the insurance industry went to work at designing additional products that would appeal to investors as well as life insurance customers. The products created were are very similar to Universal Life, but the funds in the cash account can now be directed to other investment vehicles such as mutual funds or traditional investments such as the S&P 500 and NASDAQ.
The Index and Variable UL products provide a more aggressive growth to the cash account and create a fund suitable to supplement retirement income. The greatest advantage with the UL products is the manner in which you can withdraw funds on a tax-free basis:
- Policy Withdrawal (Partial Surrender) - Once your policy value achieves an amount that will accommodate withdrawals, you can make a withdrawal of the basis funds (amount premium paid in) on a tax-free basis. Your death benefit will be reduced by the amount of your withdrawal.
- Periodic Policy Loans - You are entitled to borrow against the cash value of your policy on a tax-free basis with no repayment commitment or credit check. As long as your policy remains in force until the death benefit is paid out, there will be no tax liability for the periodic loans you take. You can pay the interest out-of-pocket or opt to have it withdrawn from the cash account as well. It's very important to stay up to date with your policy value statements to make certain your policy doesn't cancel for insufficient premium to keep it in force.
It's important to keep in mind that while you are using your permanent life insurance as a means to earn interest and withdraw the cash tax-free, you also have that all-important death benefit that will provide financial protection for your family in the event of your death.
For more information about cash value life insurance and the benefits it can provide, contact an insurance professional at Skyline Risk Management (718) 267-6600 for a free and confidential consultation.