![]() ![]() This provision also means you’ll pay higher annual premiums, as the insurance company is on the hook for a larger payout. Some policies allow you to purchase a rider that gives your beneficiaries both the death benefit and the accumulated cash value. And remember that outstanding loans and past withdrawals from cash value will reduce the payout to your beneficiaries. At your death, the cash value reverts to the insurance company. What happens when you dieĪ major selling point of whole life insurance is that it will be in force until your death, as long as you’ve paid the required premiums.īut here’s a kicker: For most policies, the policy pays out only the death benefit, no matter how much cash value you’ve accumulated. It’s wise to check once a year to verify your beneficiaries still reflect your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.ĭesignating beneficiaries is an important task, as is keeping your designation up to date with your wishes. It’s also a good idea to designate one or more contingent beneficiaries. You can designate the percentage for each, such as 75% to Mary and 25% to John. You don’t have to split the payout equally among beneficiaries. When you buy a policy, you’ll choose a life insurance beneficiary to receive the death benefit. You want to be sure that you know all the ramifications of accessing cash value prior to making any decisions. After all, one of the reasons to buy a whole life insurance policy is to get cash value, so why let the money sit there without ever using it? Outstanding loans and withdrawals will both reduce the amount of death benefit paid out if you pass away. If your withdrawal is greater, you’ll owe taxes on the difference because those are investment gains. There are no taxes as long as your withdrawal is less than the portion of your cash value that’s attributable to premiums you’ve paid. If you take a loan, it’s tax-free, and you can pay it back, with interest. You can tap into cash value with a withdrawal or a loan, or also by surrendering the policy. Using the cash value in whole life insurance ![]() It may take decades for a policyholder’s cash value to exceed what’s paid in premiums. You can choose to apply your dividends to cash value every year, but you can’t know how much that will amount to over time. That’s because most insurance companies that sell whole life also offer a “non-guaranteed” return rate of return based on dividends. Most whole life policies have a guaranteed return rate at a low percentage, but it’s impossible to know how much your cash value will actually grow. The rest goes to paying for the insurance itself and expense charges. This is because the entire premium does not go to the cash value-only a small portion. While actual growth varies by policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. The accumulation of cash value is the major differentiator between whole life and term life insurance. However, if you take out cash value that includes investment gains, that portion will be taxable. Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed with a policy loan, withdrawal or surrender of the policy. Cash value accumulation in whole life insurance Also, a cash value component will accrue over time. Once you have a policy, whole life insurance can remain in-force for your lifetime-as long as you continue to pay the premiums. Whole life insurance works by first selecting the amount of coverage that best suits your needs. Term life policies are cheaper than whole life insurance because they offer only coverage, not cash value. Term life insurance, on the other hand, offers level rates for a specific period, such as 20 or 30 years. Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed to have a death benefit when they die. The promise that your premium payments won’t go up.A guaranteed minimum rate of return on the cash value.Whole life insurance offers three kinds of guarantees: Whole life insurance offers coverage for the rest of your life and includes a cash value component that lets you tap into it while you’re alive. ![]()
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