There are two types of life insurance that can offer immediate cash value: Whole life insurance, if it has an additional paid up insurance rider, and Universal life if it is “overfunded”. Many people think life insurance is something you use when you’re dead and that’s true, but when your life insurance has cash value you can also use it while you’re alive! Cash value is one of the McFie Insuranceof life insurance.
If you want to use your life insurance while you’re alive, it helps if you know what types of life insurance generate immediate cash value. Knowing what type of life insurance generates immediate cash value, and also how long that cash value is guaranteed to last, will help you buy the best kind of life insurance to use while you are alive and still provide a benefit to your family when you die.
Although whole life and universal life insurance are two types of policies that have the ability to generate immediate cash value, and although both of these policies are classified as “permanent” insurance policies, they are far from equal. It is important to understand the differences between these policies before buying life insurance for the cash value because getting the wrong life insurance policy now could cause financial hardship in the future.
The best life insurance policy to buy if you want guaranteed cash value for life is whole life insurance. With whole life insurance, you get a fixed premium and a guaranteed death benefit. The scheduled premium payments do not increase over time and are fixed once you purchase the policy. The cash value increases over the life of a whole life insurance policy, while premiums remain level. Some whole life insurance policies pay dividends to the policy owner. Dividends can be used to further increase the death benefit and cash value of a whole life policy.
Universal life insurance is considered to be more flexible than whole life insurance. The flexibility in a universal life insurance policy can help and hurt the policy owner. To understand the benefits and problems with the flexibility of universal life insurance, it is necessary to understand a small bit of the anatomy of a universal life insurance policy. Don’t worry I’ll make it short, quick, and easy.
Universal life insurance has two parts, the insurance portion, and the cash account. The insurance portion provides death benefits by using some of the premium dollars to buy renewable-term insurance. The cash account is where the remaining premium dollars are placed after the cost of insurance and other fees have been extracted. Over time, renewable term insurance is the most expensive type of life insurance available because every year when the insurance renews the cost steps up. Ok, that’s it on universal life insurance anatomy – practically painless, right? If you understand this paragraph, you will now be able to understand the next section with no problem!
Now back to flexibility, if you want to pay less premium on Universal Life insurance in a given year, you have that option as long as you pay enough to cover the premium on the renewable term insurance, or you have enough value in your cash account to cover the premium on the renewable term insurance. On the flip side, you may be able to pay more than your scheduled premium and have the extra money go into your cash account.
The problems with flexibility arise when the cash account does not grow fast enough to keep up with the rising cost of renewable term insurance. When this happens the insurance company will use up the cash value from the cash account and bill the policy owner for larger premiums to cover the cost of insurance. These premiums can get to be so large that it doesn’t make financial sense to continue paying for the life insurance and many universal life insurance owners will surrender their policy or the policy will lapse for lack of cash value and premiums.
While universal life insurance can generate cash value immediately, it is not a good option for building cash value long term. Based on the guaranteed values, most Universal life insurance policies self-destruct at some point.
What Type of Life Insurance Policy Generates Immediate Cash Value?
1)Whole life insurance (with a paid-up insurance rider)
2) Universal life insurance (that is overfunded)
At McFie Insurancewe personally own and sell Whole life insurance with paid-up insurance riders to generate immediate cash value.
We do NOT personally own, recommend, or sell universal life insurance. There is too much risk and uncertainty for the owner of a universal life insurance policy to be able to count on the value of being there when it matters the most.
There are three ways to access your life insurance cash value:
1) Policy loan
3) Policy surrender
Borrowing money against your whole life insurance policy is the most advantageous if you want to avoid taxes and retain the size of your policy. When you access cash value via a policy loan, you have the ability to use that money tax-free and it provides you the ability to pay back the loan with money you want to return to safekeeping. If the insured dies before a policy loan is repaid then the loan will automatically be paid off by the death benefit before the death benefit is paid to the beneficiary. For example, if a whole-life policy owner with a $1,000,000 death benefit takes a $20,000 loan against their policy cash value to make an investment and dies unexpectedly before paying off the policy loan then $20,000 of the death benefit will be used to repay the loan and the remaining $980,000 will disburse the beneficiary.
Instead of taking a loan, you could withdraw cash value directly. The side effect of withdrawing money from your life insurance is that any amount you withdraw above the cost-basis (total premiums paid) will be taxable. Perhaps most problematic, however, is a withdrawal will decrease the size of your whole life policy and you will not be able to return the funds to the policy for safekeeping in the future.
Finally, you can also access the cash value of your policy through surrender. This is a good option for some people who bought universal life insurance without realizing the detrimental long-term effects. If they catch it early enough there may still be some cash value associated with their policy. But caution must be used because if surrendered too early, universal life insurance may also have surrender fees.
Surrender is usually only the best option in the case of correcting a mistake or encountering serious financial hardship.
When you own a good whole life insurance policy, accessing cash value via a policy loan is the best option in most cases.
A well-designed whole-life policy will be good for your whole life. Most universal life insurance policies self-destruct at some point.
Cash Value Life Insurance Pros and Cons
Life insurance is a great way to financially provide for your family even after you can’t. With the right policy, you can use the McFie Insuranceof your policy while you are alive too. We specialize in designing good whole-life insurance policies for people who want to protect their families and have cash value to use.
We help people keep more of the money they make, grow their wealth, and have financial peace of mind. If you have questions about life insurance, want to see a policy illustration, or need a life insurance review, contact us.