The investment feature of whole life insurance is built through your premium payments. Part of your premium payments pay for insurance coverage, and the excess go toward the cash value, or savings portion of your policy.
Cash value is separate from the amount of coverage you choose to provide your beneficiaries, which is known as the "face amount".
With the added benefit of cash value, a whole life insurance policy actually serves as an asset, and its value increases over time. This is quite advantageous! How? You can cash borrow against your cash value if ever you have an urgent need or emergency.
Whole Life Insurance: How It Works
Before we get into additional benefits of whole life insurance, let's examine how whole life insurance works.
Whole life insurance provides you with coverage for your entire life, or until you reach the maximum insured age. The maximum insured age varies according to the state you live in, and can be anywhere from 80 to 100 years of age. The premiums you pay are fixed and cash value is guaranteed--as long as you keep current on your premium payments.
It is advantageous to purchase life insurance at an early age because the younger you are the cheaper your premiums are likely to be.
Here are a couple of points to keep in mind during the early years of your whole life insurance policy:
- Your premium costs are likely to outweigh the cost of insuring your life. This is especially true the younger you are when you purchase your policy. In the early years the extra premium amount, plus interest, makes up for insufficient premiums in later years
- The face amount of your policy is likely to be higher than your cash value, especially in the early years of your policy
If you pass away, your beneficiaries receive the face amount of your policy. Of course, it is wise to purchase whole life insurance after you verify that it fits into your budget long term. However, if you must surrender your policy, you receive only the built-up cash value, not the face amount.
Borrowing Against Your Whole Life Insurance Policy
One of the benefits of having a whole life insurance policy is the ability to build cash value. You can use that cash value as an asset against loans, as long as you maintain your policy by making your premium payments. And, as long as you have sufficient cash value to secure the loan, you can borrow money from your whole life policy--tax-free.
It is important to know that if you borrow against your cash value and let your policy expire, you have to pay taxes on the loaned money. However, if you keep your policy premiums up-to-date, the loan remains tax-free.
Additionally, any loans that are unpaid at the time of death are subtracted from the death benefit.
Using Your Cash Value
So, let's say you've had your policy for several years. You want to start a new business, or some other financial emergency arises. With a whole life insurance policy, you can borrow against the cash value. An additional benefit is that the interest rate, which is pre-determined in your policy, is typically quite low.
What if you don't have enough equity in your life insurance policy to borrow against your cash value? This is likely true if you've only had your policy for a few years. Although your whole life policy has a savings element, the cash value is not exactly like a savings account in that you cannot withdraw a deposited amount.
Only part of your life insurance premium actually goes toward your cash value, while the other part goes toward the actual cost of insurance. Any which way, it is possible that you can use your policy as collateral for a loan.
The best part about using your whole life insurance policy as collateral is that your loan is secured against a solid asset. This may give you the advantage of an attractive interest rate.
Other Benefits of Whole Life Insurance and Cash Value
Aside from being able to borrow against cash value, you can also use cash value to cover your premiums in later years or to purchase more insurance coverage. However, if you decide to withdraw cash value, you may have to resume payments.
In addition to cash value, whole life insurance may also pay you dividends. You can receive dividends as cash, to cover some or all of your premiums, or to purchase additional insurance coverage.
If you are single and curious about an affordable policy that best suits your needs, obtain whole life insurance quotes from qualified agents today. It's simple! Just enter your zip code to get started.
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