Some life insurances use part of the premium you pay to build cash value – specifically, whole life insurances all types of universal life insurance (current assumption, variable and indexed). <! – ->
Technically, this cash value exists through insurance rules to give insurers a benefit for counterfeiting. However, if you own one of these cash-building forms of life insurance, you do not need to cancel or irrevocably change the insurance to use the accumulated cash value.
What type of life insurance does a savings component have?
If you buy full life insurance or universal life insurance, the insurance accumulates cash value. You can use this cash value for any purpose you want and you do not have to cancel the insurance – nor do you have to die – to use the cash.
You can think of the accumulated cash value in your life insurance. insurance as an asset you own, in the same way as cash you own in a savings or investment account. <! – ->
Life insurance is not a life insurance with a savings. So if you happen to own life insurance, it will certainly take care of your life insurance needs, but your insurance will not accumulate any cash value.
How a life insurance policy accumulates Cash value
Life insurance policies accumulate cash value from three sources:
- The premium paid by the insurance owner
- Guaranteed interest earned on the insurance cash value
- Non-guaranteed insurance interest (full life insurance) earned on the cash value of the insurance
Premium owner's premiums
To put a life insurance into force, an insured owner must pay premiums to the life insurance company. In some cases, this can only be a large premium at the beginning of the policy, but usually it looks like several premiums paid over many years. <! – ->
Part of the premiums that the insurance company receives finances the cash-building part of the life insurance policy. This happens because the life insurer technically charges the insurer more to insure you for the first few years of the insurance than it actually costs your life. The excess amount over the actual cost of insuring the insurance owner goes towards building cash value.
All cash value life insurance pays a guaranteed interest on the accumulated value of the insurance. This guaranteed interest rate does not change and the life insurer notes this guaranteed interest rate in the insurance contract.
The life insurer must pay this interest to the insurer regardless of how well or poorly the life insurer's investment works during a given year.
Non-Guaranteed Interest / Dividend
Many cash life insurance policies also earn non-guaranteed interest (or dividends when whole life insurance). The amount varies from year to year and the insurance company determines this amount at its own discretion.
If the life insurance company experiences a very good return on investment, this generally results in higher non-guaranteed interest / dividends to the policyholders. Alternatively, if the insurance company experiences poor investment returns, it generally results in lower non-guaranteed interest / dividends to insurance owners.
How does the Savings Component (cash value) help you?
Ahhh … this is probably the aspect of life insurance that our customers value the most. Ironically, it is a life insurance policy and most insurance policies have significant death benefits attached to them. In some cases several hundred dollars and in other cases many millions of dollars. But are these death benefits for the people left behind right?
What most of us who own some form of cash value life insurance (whole life or universal life) care about is the cash value because it is the part of the policy that benefits us the most while we are still alive.
If you are something like most people, do you have a retirement account or investment account or maybe several of each? Life happens and there is an emergency that puts you in a tight spot where you have to dive into one of these accounts to cover the temporary cash flow crisis. <! – ->
But when you call to transfer money or sell shares to meet your immediate cash flow needs, you get a long lecture from the "advisor" who manages the account. They talk about how it is a bad idea to withdraw money from the account, etc. They remind you that the money in this account is for later and that if you withdraw the money now, the opportunity cost will cost you a lot of time.
Now it's not that they's completely wrong, but if your car needs a new transmission and you need $ 4,000 to fix it, what's the point of the lecture ? It's not like you withdraw money from your account to spend on a wild weekend in Vegas.
It's your money, spend it
What if instead of having to hear about how catastrophic it is to take your money out for a good time, we said it was okay to spend your money. Now we would never advocate blowing it on stupid things.
It makes sense to only touch it when needed (we do not condense with your cash value to buy the 911 Turbo) but not the idea of knowing that you can use your money and not commit financially suicide by doing it do you have a certain relaxing idea about it? <! – ->
A perception that might make you feel less guilty because you need a new car and would rather not pay Wells Fargo or Ford Motor Credit 4-8% more than you need? Remember that you can take out an insurance withdrawal or loan at any time when you have an actual cash value in your insurance.
Or maybe it's just a vacation or home upgrade for you & # 39; I have wanted to do for a long time. Most of the "advisors" we've met would get a chill running over them and talk to you in their harshest voice if you told them you wanted to withdraw from your IRA to pay the bill.
Perhaps some of this is related to the fact that if you spend your money, there is less money for them to "manage" aka charge you asset-based fees?
But if you bank with a dividend paying life insurance, what is the damage? The obvious thing is that you will not have access to borrow the money for anything else until you pay it back and … well … that's all you have to pay it back. <! – ->  Seems like a fair trade to have a system that motivates me to be responsible while I continue to pay money on my money even though I took it out for a night on the city for good times (hypothetically it is)?