Cash-Value Life Insurance
Cash-value life insurance is designed as a permanent form of life insurance that includes a death benefit component and a savings component.
Cash-value savings can be accessed in many ways. With some types of policies, the cash value can be withdrawn. Withdrawals are tax-free to the extent they don’t exceed the total amount of premiums deposited into the policy. However, withdrawals can have the effect of decreasing the death benefit amount.
Whole Life Insurance
Whole life insurance covers you for as long as you live. You must pay the same amount of premium for a specific period to receive the death benefit. Normally, this policy is kept in force for the rest of your life, regardless of how long you may live. This type of insurance provides life insurance coverage with a savings feature.
The insurance company puts part of your insurance money in a high interest bank account. With every premium payment your cash value increases. This savings element of your policy builds up your cash value on a tax-deferred basis. In a way, the presence of guaranteed cash values makes this policy worthwhile because you can borrow against your cash value or surrender your policy to get the cash value in hard cash.
You can also opt to participate in the surplus of your insurance company and receive the dividends annually. You have the choice to either get your dividends in cash or let them accumulate interest. You may also use your dividends to reduce your policy’s premiums or buy additional coverage.
Whole life insurance is made to fulfill an individual’s long-term goals and it is important that you keep it in force for as long as you live. Whole life insurance is highly suitable for long-term responsibilities like a surviving spouse’s income needs and post-death expenses.
Universal Life Insurance
This policy is also termed “adjustable life insurance,” because it offers more flexibility compared to whole life insurance. You have the liberty to reduce or increase your death benefit and pay your premiums at any time and in any amount (subject to certain limits) after your first premium payment has been made.
Here, you can increase the face value of your insurance coverage. But, you need to pass a medical examination to qualify for this benefit. Similarly, you may decrease your coverage to a minimum amount without surrendering your policy. However, surrender charges may be applied against the cash value of your policy.
When it comes to the death benefit, you have two options: a fixed amount of death benefit or an increasing death benefit equal to the face value of your policy, plus your cash value amount.
You can change the amount and frequency of premium payments. You can increase your premiums or pay a lump sum according to the specified limit in the policy. A part of your premium, minus the cost of insurance is put into an investment account and the interest therein is credited to your account. In this way, the interest grows on a tax-deferred basis, which increases your cash value.
Universal life insurance offers all-round protection to your loved ones, thanks to its security, flexibility and variety of investment options. In times of low liquidity, you can alter your premium payments or may even withdraw from your cash value fund. In addition, you can increase or decrease the face value of your insurance as per your circumstances.
Indexed Universal Life Insurance
Indexed universal life (IUL) allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P 500 or the Nasdaq 100. IUL policies are more volatile than fixed ULs, but less risky than variable universal life policies because no money is invested in equity positions.
IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key person insurance for business owners, premium financing plans or estate-planning vehicles.
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