Depending on the type of permanent life insurance policy you have, like whole life insurance, universal life insurance, variable universal life insurance, etc., the cash value portion of your policy has an opportunity to grow with interest. Some types of life insurance will guarantee the interest rate at which your cash value grows, while other types may not make a guarantee as you invest your policy’s cash value in the market.
Before you purchase permanent life insurance, it’s important to understand how your policy generates interest and your options for the account’s potential growth. Speaking with a licensed insurance agent can help.
Cash value life insurance is unique in its ability to serve two roles at once — it’s both a safety net for your family and a savings vehicle for you. Over a long-term period, a portion of your premium payments contributes to a cash value account that accumulates on a tax-deferred basis.
Imagine two life insurance policy holders, Alice and Jane. Alice opts for term life insurance with a 30-year term, while Jane goes for a cash value policy. After 30 years, Alice would have paid premiums solely for a death benefit that she never used (assuming she’s still alive at the end of the term). Jane, on the other hand, not only has a death benefit but has also built a cash reserve that she can utilize for a variety of needs like retirement, college tuition for children, or even a down payment for a house.
Another advantage of cash value life insurance is the flexibility to adapt your financial planning based on your changing needs. Policies such as universal life insurance allow you to adjust the premium payments and death benefit as necessary, so long as you pay the regular premium amount. This adaptability is particularly beneficial during economic uncertainty or significant life changes.
This means that if you’re doing well financially and have more disposable income, you can opt to increase your premiums to accelerate the growth of the cash value. Conversely, if you encounter financial hardship, you can lower your premium payments or even use the accumulated cash value to cover the premiums temporarily, ensuring the policy stays in effect.
In some cash value policies, you may be able to invest the money you’ve saved. Whole life insurance policies usually offer a guaranteed minimum interest rate for the cash value, providing a secure return. Variable life and variable universal life insurance policies, on the other hand, allow you to invest the cash value in sub-accounts similar to mutual funds, which have the potential for higher returns. However, variable universal life insurance policies can also be riskier since your money’s growth is determined by the market.
When you withdraw funds or loan money from a cash value life insurance policy it can alter the policy’s death benefit. When you take out a policy loan and fail to repay it by the time of your death, the outstanding loan amount, along with any accumulated interest, will be deducted from the death benefit. This reduction diminishes the financial safety net you intended to leave for your beneficiaries. Withdrawals similarly impact the death benefit, often reducing it in proportion to the amount withdrawn.
Maintaining a cash value life insurance policy demands regular premium payments to keep the policy in force. Failure to make timely payments puts the policy at risk of lapsing. When a policy lapses, you risk losing not only the death benefit but also the accumulated cash value.
Premiums for cash value insurance policies can be significantly higher than for term life policies, since term life policies do not accrue cash value.
However, cash value policies can accrue considerable value over a span of 15 or 30 years. Buying a cash value policy when you are in good health and under the age of 35 can provide a substantial nest egg that you can use as needed.
While it’s best to purchase any type of life insurance in your younger years, there are cash value life policies for older adults too. Fidelity Life offers life insurance for seniors at many ages, whether you’re in your 50s getting ready to retire or in your 80s looking for a way to cover final expenses.
Since you can only benefit from the cash value of your policy while you are living, it’s important to use it while you can. People use the cash value from life insurance in four main ways: a loan, withdrawal, surrender, or to pay premiums.
Cash value life insurance policies can allow you to take out a loan to pay off a home mortgage early, cover a child’s college tuition, or go on a vacation. However, if you don’t pay the loan and all interest back before your death, your death benefit will be reduced by an amount equal to the balance of the loan and fees.
For example, Jeremy has a cash value policy with a death benefit of $500,000. He has enough accrued value to take out a $75,000 loan. Jeremy passes away before his loan is paid back, with $40,000 still owed in total. His beneficiary received the death benefit less the amount owed, or $460,000.
Under a type of insurance called universal life, you may be able to take a portion of your cash value as a partial withdrawal. However, you cannot do this for a whole life policy, where the only way to access the cash value without lapsing the policy is through a policy loan. Be mindful that if you withdraw more than what you’ve paid in premiums, it can impact your death benefit, much like a loan.
For example, Sarah has a cash value policy and loses her job. She may use her accrued balance as an emergency fund. The cash value may serve as a financial cushion, helping her manage living expenses without taking out a high-interest loan.
There are a range of affordable Fidelity Life products to choose from based on your situation and financial responsibilities.
If you have other plans for life insurance coverage, like an affordable term life insurance policy, you may wish to surrender your policy completely, taking the cash value and losing your potential death benefit. There is typically a fee for taking a cash payment, which will vary and may be a different amount for a withdrawal vs. a surrender.
Before you surrender a life insurance policy, speak with a financial professional or licensed insurance agent and ensure you fully understand the cash surrender value, including any fees you’ll be responsible for paying.
Some policies allow you to either direct your cash value balance toward your premiums (a convenient option once you retire) or request that your death benefit be raised.
A cash value policy gives you multiple options for using accrued funds during your lifetime and still provides a substantial death benefit for your heirs.
To maximize your cash value growth you should regularly review your policy to gauge how your cash value is accumulating. Conducting periodic reviews allows you to adjust your financial planning to align with your policy’s performance. Your policy should come with regular statements detailing your cash value’s growth, fees, and death benefit. Monitoring these actively prepares you to make the right decisions, whether that’s adjusting premium payments or reevaluating investment choices.
It’s also important to read and understand the terms and conditions of your cash value policy. Different policies will have different rules regarding loans and withdrawals. Knowing these conditions helps you make informed decisions and maximize the financial benefits of your policy.
Cash value life insurance policies fall under state insurance regulations, which aim to protect consumer interests. Consumer protection starts with being an informed policyholder. Therefore, understanding your rights and obligations under the policy is vital. Consulting with a licensed insurance agent and reading all the policy documentation can provide you with the necessary insights to make educated choices.
Life insurance with cash value can be a good option if you can spend a bit more and plan to leverage the benefits of cash value while you’re alive. If you want to provide financial security for loved ones and want a more affordable option, consider term life insurance which provides the same financial protection at a lower price point. Our team of licensed insurance agents can help you understand each type of life insurance to choose the one that best fits your lifestyle, needs, and budget.
Life insurance policies with larger coverage amounts are meant to help cover ongoing financial responsibilities for your family so they maintain the quality of life you worked hard to achieve. These expenses may include a mortgage, college for children, as well as replacing lost income.
Final expense insurance offers smaller coverage amounts that can help with medical and end-of-life costs, as well as funeral expenses. It can also be used to pay off credit card bills or other debts. For more mature or retired adults who aren’t looking to replace lost income, but are looking to lessen the burden on friends and family when they pass, final expense insurance can provide that peace of mind.
While you might not have large financial responsibilities any longer, funerals can still add up. It’s important to make sure you have enough to cover all the expenses, which can include:
You also might want to set some money aside for other expenses, such as music, food, or a traditional church service. If you’d prefer a small ceremony in a separate location where loved ones can scatter your ashes, consider associated costs like travel and accommodation.
Beyond the cost of your funeral, some other end-of-life costs to consider include:
If you’re still looking at other options, don’t forget that:
Consider your current savings and assets before applying for a final expense policy. Once you’ve added those up, the difference between those assets (savings, income, investments, etc.) and any end-of-life expenses is the coverage amount you should consider buying. Our agents can help you find the right coverage level for your needs.
Final expenses can include medical costs, end-of-life care, and funeral services including burial and cremation. However, the death benefit can be used flexibly for whatever the beneficiaries decide. Credit card bills and other existing debts can be paid off using a final expense death benefit.
Many people choose a family member they trust as a beneficiary to take care of funeral costs.
If your spouse has passed away and you have no close relatives, though, it may make more sense to name your funeral home. This means your preferred funeral home would be the primary beneficiary of your policy payout. You can also name someone else as your secondary beneficiary to receive any money that remains after your funeral.
In this situation, the funeral home would receive the payout first when you die to cover your funeral costs and the rest would go to your secondary beneficiary.
You can usually arrange this ahead of time with your funeral home, but keep in mind that this is not an option for every facility. Some funeral homes require upfront payment and won’t accept other arrangements.
RAPIDecision® Final Expense is a permanent life insurance policy. As long as the premium is paid, the policy is in force and your insurance coverage remains fully intact.
Retired or more mature adults between the ages of 50-85 looking to supplement their existing life insurance or ensure final costs are taken care of may be interested in final expense insurance.
Remember costs go up as you get older, so if you anticipate needing a final expense policy, it’s better to get covered sooner than later.
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