If you take a loan, it’s tax-free, and you can pay it back, with interest. You can tap into cash value with a withdrawal or a loan, or also by surrendering the policy. Using the Cash Value in Whole Life Insurance It may take decades for a policyholder’s cash value to exceed what’s paid in premiums. You can choose to apply your dividends to cash value every year, but you can’t know how much that will amount to over time. That’s because most insurance companies that sell whole life also offer a “non-guaranteed” return rate of return based on dividends. Most whole life policies have a guaranteed return rate at a low percentage, but it’s impossible to know how much your cash value will actually grow. The rest goes to paying for the insurance itself and expense charges. This is because the entire premium does not go to the cash value-only a small portion. While actual growth varies by policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. The accumulation of cash value is the major differentiator between whole life and term life insurance. However, if you take out cash value that includes investment gains, that portion will be taxable. Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed with a policy loan, withdrawal or surrender of the policy. Whole life insurance is a type of cash value life insurance. Cash Value Accumulation in Whole Life Insurance Also, a cash value component will accrue over time. Once you have a policy, whole life insurance can remain in-force for your lifetime-as long as you continue to pay the premiums. Whole life insurance works by first selecting the amount of coverage that best suits your needs. Your premiums will be lower for a set number of years-such as the first three to five-and then higher for the remainder of your lifetime. Modified premium: Modified whole life insurance policies require premium payments that will increase after an introductory period. After this time period, the policy is paid up and no more payments are required. Limited payment: You’ll pay regular premiums for a set number of years, such as 10 or 20 years. Cash value will be available right away and you’ll have no further premiums to pay. Single premium: You’ll pay the entire cost of the policy upfront. Pay premiums on a regular basis: You’ll pay a fixed amount monthly, quarterly, semi-annually or annually. You may find differences in how you can pay for a whole life insurance policy. With a non-participating policy you won’t get any dividends.You can take the dividends in cash, use them to pay premiums, or use them to increase the face amount of your policy. Dividends are not guaranteed, but many life insurance companies are known for paying consistent dividends year after year. With a participating whole life insurance policy you are eligible to receive life insurance dividends from the insurer each year, which are essentially a refund of excess premiums paid by policyholders.If you’re buying whole life insurance, confirm that the policy is “participating” so that you can reap the benefits of dividends. Policyholders of whole life insurance are usually eligible for annual dividends from the life insurance company. Term life policies are cheaper than whole life insurance because they offer only coverage, not cash value. Term life insurance, on the other hand, offers level rates for a specific period, such as 20 or 30 years. Whole life insurance is more expensive than term life insurance because people with a whole life policy are guaranteed to have a death benefit when they die. The promise that your premium payments won’t go up.A guaranteed minimum rate of return on the cash value.Whole life insurance offers three kinds of guarantees: Whole life insurance offers coverage for the rest of your life and includes a cash value component that lets you tap into it while you’re alive.
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