Some single moms are drawn toward the idea of combining her life insurance need with investing for the future of her family. The premiums for cash value insurance may be higher that the cost of term life insurance, and if payments are missed the policy could be cancelled and you would not be able to get your money back.
Whole life, universal life, variable universal life and variable whole life are all types of cash value insurance. They have varying risks associated with them, just as other types of insurance.
Whole Life Insurance
A whole life insurance policy has a cash value that increases in value over time. Sometimes the life insurance policy will even pay dividends to the policy holder.
Unlike a term life policy, the single mom doesn’t have to renew the insurance, a process that could often mean having to pay a higher rate. When you enter into the agreement, you make monthly payments for the rest of your life. The amount of the payment never goes up. Part of the monthly premium goes into the cash value of the policy, which you could consider an investment. The cash value amount of the policy is guaranteed to grow. The rate of growth is fixed.
The income from the growth of the cash value of the whole life policy is tax deferred. It will be paid when the benefit is paid out upon your death.
The younger you are when you purchase the whole life insurance policy, the lower your premium will be. This is because you will be expected to be paying into the policy a lot longer than an older person would.
Once the cash value of your whole life insurance policy reaches a certain level, the policy holder can borrow against it. If death occurs before the loan is repaid, the outstanding amount plus interest will be withheld from the benefit. The loan against the cash value of the policy usually offers lower rates than loans from other financial institutions.
Universal Life Insurance
Universal life insurance is an adjustable life insurance with a flexible premium. Unlike the whole life policy, the cash value is credited first and then the expenses of the policy and the death benefit are deducted from the cash value. The minimum rate of interest is fixed and the growth rate is tax deferred.
Universal life policies lets the policy holder adjust the amount of premium that they pay on a monthly basis with limits on how much lower or higher amount can be paid and still remain covered. The premium can be met from the cash value. Be careful, though, if you make lower payments. If the cash value of the policy gets too low, the policy could lapse.
Variable Universal Life
A higher risk investment, variable universal life lets you choose where the cash value that has accrued on the life insurance policy is invested. Like other investments, it offers greater potential for the cash value to grow, but at the same time the risks are higher.
Variable Whole Life Insurance
This option also allows you to choose where the value of your policy will be invested. Both the cash value and death benefit paid to the beneficiaries will depend on how the investment performs.
The post Understanding Cash Value Life Insurance appeared first on .
