Cash value life insurance provides both
death benefits and a savings feature. When you buy a
permanent or cash value policy, part of your premium pays
for the life insurance protection and part goes toward the
savings component. As you pay your premiums the savings
portion is invested, and the principal and earnings
accumulate as your cash value.
You aren't required to leave the funds in
the policy, however. You can sometimes withdraw from or
borrow against the accumulated cash value. You can then use
the withdrawn or borrowed funds to finance your retirement,
pay a child's college tuition, or assist a child with a down
payment on a house, among other things. This type of
insurance can be a valuable asset, both as an investment and
for life insurance purposes.
Types of life insurance policies you
can use to save
Whole life:
With a whole life policy, insurers generally invest the
funds primarily in long-term fixed-rate securities (bonds,
for example) that typically provide the policyholder with
modest returns of perhaps 3 to 5 percent. Additional returns
may also be achieved through dividend distributions (if
applicable). Yet, because whole life premiums don't
vary in frequency or amount as they might with universal
life, whole life is a more predictable product.
Variable life:
With a variable life policy, you choose how to invest the
premiums from the investment choices available in the
policy. You can place them in potentially higher-yielding
stock and bond funds if you desire. The funds are invested
at a variable rate of return. Since you control how the
funds are invested, you can choose more aggressive
investments if the markets are flourishing. Over the last 20
years, the return on variable life policies has far exceeded
the return on most whole life policies. A variable life
policy is an appropriate choice if you can tolerate the
higher degree of risk. However, variable life returns depend
on market conditions. Therefore, while you'll receive strong
returns when the market is soaring, your returns will drop
when the market falls.
Universal life:
With universal life, the insurer invests the savings
portion of your premium in a fixed-rate account that is
subject to change at regular intervals. You have no control
over how the funds are invested. These investments can yield
fairly attractive returns when rates on fixed investments
are rising. However, while you generally receive interest at
close to market rates, you can't easily predict the
long-term return. Since universal life policies typically
allow you to raise or lower your premiums on an annual
basis, you can increase your contribution when the insurer
is offering a higher return. This flexibility with premium
payments is one of the primary advantages of universal life.
Variable universal life (VUL)
With variable universal life, you choose how to invest
the premiums. You are given a number of investment accounts
to choose from, ranging from conservative to aggressive
portfolios. A VUL policy is a viable choice to consider if
you can tolerate the higher degree of risk involved.
However, VUL returns depend on market conditions. Therefore,
when the market falls, so will your returns. VUL typically
allows you to raise or lower your premiums on an annual
basis. This flexibility with premium payments is a key
advantage of VUL.
Advantages of using life insurance as a
savings vehicle
- It provides life insurance protection
for your family.
- You can earn money on your premium
payments (depending on investment performance).
- The cash value grows tax deferred until
withdrawn or surrendered.
- Sometimes you can withdraw from the
cash value (generally up to a certain percentage).
- You can borrow from the cash value at a
relatively low interest rate (the amount you can borrow
will vary by policy type).
- You may be able to combine a policy
loan with a policy withdrawal.
- You may have a number of investment
choices (depending on policy type).
NOTE: Depending on the specific type of
cash value policy, some of these advantages may apply in
varying degrees or not at all.
Learn More...
Life
Insurance Overview | Understanding
The Basics | Term
& Cash Value
Coverage Amounts
| Reading Policies | Planning
Concerns | Life
Calculator | Life Glossary
Please Note: The
information contained in this Web site is provided solely as a source of
general information and resource. It is a not a statement of
contract and coverage may not apply in all areas or circumstances. For a complete
description of coverages, always read the insurance policy, including
all endorsements.
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