The following article examines three different whole life cash value charts to understand how different policy designs affect the outcome of the policy’s long term cash value growth.
So, let’s begin with answering,
What is Whole Life Insurance Cash Value?
Permanent life insurance that builds cash value and acts as a tax-advantaged financial tool for generating tax-free income, paying off high-interest debt, and even becoming your own “banker”
Permanent life insurance is an integral part of most financial or retirement plans. Although most people don’t relish the idea of discussing their own mortality, the reality is that if you have people in your life who would struggle financially if you were no longer here, then it is likely that you need life insurance.
While some types of life insurance policies provide “basic” death benefit only protection, there are others that offer many additional enticing features – benefits that can be enjoyed while the insured is still alive – based on how the permanent life insurance policy is structured.
One of these types of policies is whole life insurance. But not all whole life insurance policies are exactly the same. So, it is important that you have the right type of cash value life insurance plan in place. Otherwise, you could end up unintentionally forfeiting various benefits that you – and those you care about – were counting on.
The Key Components of Cash Value Whole Life Insurance
Cash Value Whole Life is a form of permanent life insurance coverage. This means that the policy will remain in force – for the “whole lifetime” of the insured – as long as the premium is paid. These policies include two primary components. These are the:
- Death benefit
- Cash value
A whole life insurance policy differs from term life insurance, which only offers a death benefit (with no accumulated cash value account growth). There are some additional differences between term and whole life.
Term Life Insurance
Term life is typically used for “temporary” life insurance needs because, as its name implies, it only remains in force for a certain amount of time, or “term,” such as 1 year, 10 years, or 20 years.
The cost of a term life insurance policy is oftentimes low, especially if the insured is young and in good health at the time of application. However, the term policy does not last the insureds entire lifetime, which can pose a problem down the road if the insured wishes to keep the life insurance after the term expires.
If the insured is still alive after a term life insurance policy has come to the end of its time limit, he or she may have to requalify if they want to renew their coverage. At this point, the new life insurance premium going forward will usually be higher (and in some cases, much higher) because it will be based on the insured’s then-current age and health condition.
If the insured has contracted a serious health condition, they may even be considered uninsurable – and this could have devastating financial consequences for loved ones who were counting on the funds for their future financial support.
With a whole life insurance policy, though, the coverage will stay in force, and generally, the life insurance premium amount will remain the same for the entire life of the policy – even as the insured ages, as well as if they become seriously ill.
Because of this, owning whole life insurance can be a viable strategy for ensuring that you will have financial protection in place for your survivors, both now and in the future. Plus, the death benefit funds are also received income tax-free to the beneficiary(ies).
Whole life insurance also includes a cash value account. The funds that are in this part of the policy grow tax-deferred, meaning that there is no tax due on the gain unless or until the money is withdrawn.
While whole life insurance is also designed to pay an income tax-free death benefit to beneficiaries, because of the accumulated cash value growth, these flexible financial tools can be used for so much more – such as:
- Generating tax-free retirement income
- Paying off higher-interest debts (such as credit card balances)
- Providing another avenue for tax-advantaged growth (in addition to IRA and/or retirement plan funds)
- Paying the policy’s premium (as versus making these payments out of pocket)
- Making purchases – including “high ticket” items like vehicles – without having to borrow money from a bank or other lender
How Cash Value Builds in a Whole Life Insurance Policy
When you make a premium payment on a whole life insurance policy, the insurance company divides your funds into three “pools.”
One of these goes towards the death benefit (with the cost being based on the insured’s age, health, and other underwriting factors), another goes for the operating costs of the insurer, and the third goes into the policy’s cash value account.
The cash value can be further enhanced through the use of riders, such as the paid up additions rider.
Although some other types of permanent life insurance policies provide the opportunity to generate higher returns, the funds that are in a whole life policy’s cash value grow based on a guaranteed rate that is set by the insurer.
This rate is typically somewhat low – around 3-4%. But your principal and your previous gains are also protected from market risk, so there is no need to “make up” for any losses – even if the stock market endures a significant correction.
The tax-deferred nature of whole life insurance cash value can also help to boost your overall return. That is because the money is generating a true compound interest return on your principal, as well as on prior interest, and on funds that would have otherwise been paid out in taxes each year.
True Compound Interest
Therefore, compared to a fully taxable account, whole life insurance cash value can perform substantially better over time as a true compound interest growth account (with all other factors being the same).
Tax-Deferred versus Fully Taxable Account
Although the cash component of a whole life insurance policy will usually grow somewhat slowly in the initial years (due in large part to your premium going to pay the insurer’s expenses), the value can really snowball over time due to true compound growth, particularly given its tax-advantaged nature.
So, with that brief look at what makes whole life insurance so great, let’s take a look at some cash value charts.
(Please note, you can click the following link if you are interested in seeing some whole life insurance rates.)
Whole Life Insurance Cash Value Charts
We will be looking at three different whole life insurance cash value charts. Policy one designed for maximum death benefit, policy two is designed for accelerated cash value growth, and policy three is focused on maximum early cash value accumulation.
Taking a look at a basic whole life insurance cash value chart (see below) can provide more insight on how the funds perform over time. Using an example of a $12,000 yearly premium, the funds in the initial years go entirely towards the cost of insurance, as well as to the insurer’s operating costs.
Over time, though, the cash value account grows – especially given the tax-deferred feature that takes annual gains taxes out of the equation. Due to the amount of cash in the policy, the insured can eventually stop making premium payments altogether, and instead keep the policy in force by using money from the cash value to fund it.
Whole Life Cash Value Chart #1
|Policy Year||Age||Annual Premium||Annual Cash Value Increase||Total Cash Value|
Using Riders to Enhance Whole Life Insurance Cash Value Build-Up
As with many other financial and insurance products, whole life can be “customized” so that the policy more closely fits in with your specific needs. One way to do this is by adding various riders.
Paid Up Additions (PUA)
One in particular is the paid up additions, or PUA, rider, which can allow you to have equity in your whole life insurance policy starting in the very first month. This is one of the most powerful components with respect to the accumulation of cash value in a whole life insurance policy.
In essence, a paid up additions rider adds more dollars into a participating (i.e., dividend paying) whole life insurance policy which increases the performance of the policy’s cash value account.
In this case, every dollar of premium that is allocated to the paid up additions rider creates a small “paid up” insurance policy that has its own cash value that is created right away.
With that in mind, a whole life insurance policy that has a substantial portion of its total premium payment going towards paid up additions will often perform much better than those that do not take advantage of PUAs.
Given more of a focus on growing the cash (and less on the policy’s death benefit coverage), take a look again at the whole life insurance cash value chart above that shows the base plan and compare it with the chart below which shows a policy that includes a PUA rider on it.
As with the base plan, the insured starts the policy at age 36, and pays a premium of $12,000 per year into it between Year 1 and Year 40 (until age 75), for a total input of $480,000 in premiums paid in.
Whole Life Cash Value Chart #2
|Accelerated CV Growth|
|Base + PUA|
|Policy Year||Age||Annual Premium||Annual Cash Value Increase||Total Cash Value|
PUA + Term Rider
To maximize the growth in the cash value account even further, yet another alternative could be to add a paid up additions rider, as well as a term rider. In this scenario, you would add term life insurance into the overall mix.
Why would you do that – especially if you already have a whole life insurance policy that provides death benefit protection?
One reason is so that you don’t “overfund” the whole life policy and turn it into a Modified Endowment Contract, or MEC – which could take away the tax advantages of the plan. In its most basic sense, a Modified Endowment Contract is a tax qualification of a life insurance policy whose funding exceeds federal tax law limits.
According to the IRS, if a policy holder places too much cash inside of a life insurance policy, it will lose its status as “insurance,” and it instead becomes an investment vehicle – and this can erase its tax-advantaged status, such as allowing the cash value to grow on a tax-deferred basis.
By adding a term rider to your policy, then, the amount of the death benefit is increased, which can help to keep the policy from becoming a Modified Endowment Contract – and allow you to place more money into the paid up additions rider, increasing the cash value even faster.
So, in some instances, it makes sense to include a term rider to your plan. Here again, by paying premiums of $12,000 per year for 40 years, the cash value account could end up growing to nearly $3.5 million – which represents more than 7 times the premium cost outlay…and this is accomplished with no stock market risk to contend with. As an added “bonus,” the policy will provide an income tax free death benefit to the beneficiary(ies) if the insured passes away.
Whole Life Cash Value Chart #3
|Maximum CV Growth|
|Base + PUA + Term|
|Policy Year||Age||Annual Premium||Annual Cash Value Increase||Total Cash Value|
!!!Not All Whole Life Insurance Policies are Exactly the Same!!!
Even though it is possible to build up a significant amount of cash value in a whole life insurance policy, it is absolutely essential to understand that not all of these policies are exactly the same. In fact, there are certain types of whole life insurance policies that are only offered through specific insurers that can provide this type of performance.
These are known as “participating” whole life policies – and they are provided through mutual life insurance companies.
Mutual life insurance companies are essentially “owned” by their policy holders. Therefore, these individuals have a right to vote on the board of directors. They may also receive dividends on their whole life insurance policies.
The life insurance dividends may be added to the cash value account, which in turn, can add even more to the total value of the account. While the payment of dividends is not guaranteed, there are some mutual insurance carriers that have consistently paid dividends every year to their policy holders for well over 100 years.
A mutual life insurance company differs from a “stock” insurance company in that the latter are owned by stockholders. Therefore, the key objective of stock insurers – like most other publicly traded companies – is to generate a profit for these shareholders, and this may not necessarily benefit the company’s insurance policy holders.
The dividends that are paid out by a mutual life insurance company are in addition to the guaranteed annual cash value account increases. Given that – plus the tax-deferred nature of the cash value growth – it is easy to see how a properly structured whole life insurance policy from a mutual insurer could add a significant amount of cash that could be used for any number of pursuits, such as retirement income or purchasing cash flowing real estate.
What Other Types of Life Insurance Have Cash Value?
The other primary type of life insurance that has a cash value component is universal life insurance. There are three types of universal life policies, guaranteed universal life, indexed universal life and variable universal life.
Guaranteed Universal Life Insurance grows at a fixed rate set by the insurer. Indexed Universal Life grows based on an underlying index, such as the S&P 500. And Variable Universal Life grows based on an investment fund performance, much like a mutual fund.
How (and How Not) to Access Funds from Life Insurance Cash Value
If you opt to access funds from the cash value account of a whole life insurance policy, there are a couple of ways to go about it. One is to simply take a withdrawal. By doing so, however, you will have to pay tax on any amount of the withdrawal that is considered gain.
Borrow Against Your Cash Value
An alternate option could be to take out a life insurance loan. If you go this route, the money that you access via a loan will be tax-free. In addition, because you are actually taking a loan from the insurance company – and not technically borrowing funds from the cash value of the policy itself – interest will continue to accumulate on the entire amount of your cash value.
For instance, if your policy has a cash value of $80,000 and you borrow $30,000, interest will continue accruing on the entire $80,000. What other bank or lender would allow you to do that?
Although there is typically a small amount of interest that is charged on the outstanding balance of a loan from the cash value of a whole life insurance policy, it is generally less than that of a bank, credit card, or other type of personal loan interest.
Plus, the loan balance does not necessarily have to be repaid during your (or the insured’s) lifetime. In this case, if there is still an outstanding loan balance upon your passing, it will be paid off using the policy’s death benefit proceeds. Then, the remainder of the funds will be paid out to your beneficiary(ies).
How to Choose the Right Whole Life Insurance for Your Specific Objectives
There is a long list of reasons why whole life insurance could be a good addition to your overall portfolio – and they go far beyond just the payout of a death benefit for your beneficiaries in the future.
In fact, there are many cases where it makes sense to minimize the death benefit, while at the same time taking steps to maximize the cash value component of the policy.
When putting together a plan, though, it is essential that all of the proper steps are followed.
In addition, not all whole life policies are the same, nor do all insurance carriers offer the best type of plan to use in the cash value strategy you are looking for.
Pro Client Guide
Because there can be so many parameters to be mindful of, it is recommended that you discuss your goals and needs with a life insurance specialist who can guide you through all of the steps, as well as help you to narrow down which type of policy and life insurance company is best for you. They can also help you to ensure that the policy you go with does not turn into a Modified Endowment Contract and lose the tax advantages that you were counting on.
If you’d like to learn more, simply follow this link to watch our webinar about the High Cash Value Base + PUA + Term designed policy described above.
At Insurance and Estates, we place a key focus on creating strategies that can help grow and protect your assets and income, as well as the people you love and care about. So, if you would like to set up a time to discuss your specific objectives – as well as possible solutions – contact Insurance and Estates by calling (877) 787-7558 or send us an email by going to email@example.com. We look forward to talking with you.