Life insurance is a form of protection against financial strife that dependent family members and loved ones face when a person dies. As such, life insurance can be very useful for those who have young children, or any other dependent family members. There are different types of life insurance policies. The two main types are permanent insurance and term insurance. ‘Whole life insurance cash value’ is a type of permanent insurance.
Whole life permanent insurance policies are not valid only for a certain period, but until death, whether it is whole life insurance cash value component or universal life policy. This means that the policy does not have to be renewed each year, or after short periods of time, like a term insurance policy. However, the term periods can differ and today it may be possible to get term insurance policies with level premium terms of up to 30 years.
As opposed to a term insurance policy which is designed to expire at some point, a whole life insurance cash value policy, or any whole life permanent insurance policy is designed to pay-off. Since the policy continues until the end of life, it will pay-off at some point. How much it pays will depend on the precise nature of the policy, whether there is any additional investment option, such as in a whole life cash value policy.
The premium on a whole life insurance policy usually remains the same until the policy ends. In the whole life insurance cash value type of policy, the cash value that builds-up over time is tax deferred, which means that you do not need to pay tax on it at that time. You can also borrow money against this cash build-up without being taxed. This is one of the main selling points of this type of insurance.
Another selling point is the fact that this can be a secure type of insurance policy. In general, whole life insurance policies are designed to pay a certain pre-agreed fixed amount upon the policy holder’s death. In addition to this fixed amount, there may be an additional component made up of other investments made by the insurance company with your money. The type of insurance policy determines what kind of investments will be made.
Whole life insurance cash value is a policy where in addition to life coverage, a cash value component is also paid out. This is linked to an investment fund. Returns from the investment fund, as well as a portion of your premium makes up the cash value component in a whole life insurance cash value policy. The cash value component therefore depends on the performance of the investment.
So in that sense, the pay-out of a whole life insurance cash value is sensitive to any ups and downs in the rate of interest. If the investment component of the policy were to perform badly, this naturally has an impact on your cash value build-up. So what happens if the investment performs rather badly and is worth next to nothing? Does this mean that you end up losing all of your money?
Most whole life insurance cash value policies offer a minimum guaranteed cash value. This means that even if ultra-low interest rates were to mean that the return on your investment is very low, there is a minimum cash value amount that you are guaranteed to receive. This is usually the case with this type of whole life policy, but it is always advisable to double check with the policy provider.
Some other types of whole life insurance policies include universal life insurance, which combines term insurance with an investment component usually tied to the stock market. The return on the investment is not guaranteed, and depends entirely on the performance of the investment and current market rates. This type of policy is prone to any fluctuations in interest rates.
Whole life insurance cash value policies are designed to be consistent and provide some amount of security. The investments made tend to be low risk, which means they might earn less than other more adventurous investments, but tend to be more secure. Whole life insurance cash value is all about being consistent – the premium remains the same, the payout remains fixed, and there is a guaranteed minimum cash value build-up.