How life insurance helps cash accumulation

The main purpose of life insurance is to provide the final cost and protect the beneficiary from loss of income or debt burden in the event of the death of a family member.

However, permanent life insurance policies can build up cash value and can be used in retirement or emergency situations. Whole life insurance and variable universal life insurance (VUL), if sufficient funds are available, can provide a way to accumulate cash. Cash can be obtained through policy loan terms or direct withdrawals when needed. We discuss both below.

Key points

  • Both whole life insurance and variable universal life insurance help policyholders build cash value that can be used in retirement or emergency situations.
  • However, it can take years to establish cash value in a lifetime policy, especially in an environment where interest rates are at historically low levels.
  • For variable universal life insurance, cash value grows faster because premiums are invested in the stock and debt markets. However, policyholders will subsequently face market risks.

Life insurance policy

A lifetime policy is usually one of the most expensive to buy. How does the insurance company determine your premium based on factors such as the applicant’s age and health status, and whether the insured person uses tobacco or not?

According to experience, younger insured persons pay less premiums than older insured persons. A 25-year-old male non-smoker might pay about $900 a year for a $100,000 death pension, while a 40-year-old male smoker might want to pay $1,800 a year in insurance premiums. Part of the annual insurance premium collected is used for the net cost of insurance, commissions and management costs, while the balance is increased at a fixed interest rate determined by the issuer.

In the first few years of whole life insurance policies, cash value slowly accumulated. When the total premium paid is equal to the cash surrender value of the policy, it will take several years (especially when interest rates are at historically low levels) to reach the break-even point. However, at any time, you can obtain the rights and interests in the policy through loans or withdrawals. The premium level determined at the time of issuance can also be increased by paying annual dividends from a mutual insurance company in which the policyholder has ownership.

In addition, some insurance policies provide paid-up additional insurance options, allowing policyholders to contribute additional dollars, increase death benefits and earn interest. The lifetime cash value has increased unabated, and can grow to a considerable amount, depending to a large extent on the number of years the premium has been paid and the internal rate of return provided by the insurance company.

Variable Universal Life Insurance (VUL)

Policyholders with a risk appetite can choose a variable universal life insurance policy. These contracts allow flexible payments and provide a separate account to invest premiums in mutual funds.

Unlike whole life insurance policies, the cash value invested in a segregated account is neither fixed nor supported by the financial strength of the insurance company. In contrast, funds used in mutual fund sub-accounts face investment risks. The main advantage of a VUL policy comes from participating in the stock or debt markets. Over time, the performance of these markets may exceed the fixed interest rate determined by the insurance company.

Compared with life insurance policies that may be included in the premium at a 4% interest rate, the cash value in the VUL stock portfolio has grown faster, with an average annual return rate of 7% during the validity of the policy. A 30-year-old female non-smoker can contribute $100 per month to the lifetime or VUL policy for 35 years. If the VUL sub-account manages to exceed the fixed interest rate included in the lifetime premium, the difference in accumulated cash value will be large.

If the policy and insurance costs are not considered, if the average return of the VUL portfolio is 7% and the average return of the fixed options is 4%, then the cumulative value difference of the monthly periodic contributions of $100 over the 35-year period will exceed $85,000. . Policyholders who wish to use the VUL policy as a supplementary cash accumulation tool should have a longer time frame and moderate risk tolerance.

Bottom line

Whole life insurance and variable universal life insurance are two types of permanent life insurance policies. If sufficient funds are available, they can help policyholders accumulate cash that can be used in future life. Whole life insurance policies will accumulate cash more slowly. In the case of low interest rates, it may take several years to reach the point where the total premium paid equals the cash surrender value of the policy. On the other hand, variable universal life insurance provides an opportunity to build cash value faster by exposing policyholders to riskier stock and debt markets.


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