Getting life insurance is a great way to protect your loved ones if you unexpectedly pass away. But understanding the terms used in the industry is often challenging. Staying informed as you make your decision will help you make the best choice.
What if You No Longer Need the Policy?
Some might not want to take out a life insurance policy because they are afraid there is no way out if they have financial hardships. There might not be any alternatives except for the policy, or you may no longer need it once your kids have grown up and moved out.
Before making a purchase, do your research to learn about cashing out life insurance. Your options include taking out a loan against your policy, surrendering it, or selling it in a viatical settlement.
If you have a $50,000 policy, you can’t just get $50,000 for it – that figure refers to the death benefit, and it goes to the beneficiaries when you pass away. The exception is terminal illnesses since companies might allow owners to receive a portion of the death benefit for end-of-life expenses.
But the money you receive during your life comes from the cash value, although not every type has this component.
What is the Cash Value?
This is a built-in policy savings account that accumulates value over time. A portion of the premiums goes toward the cash value. If you need funds immediately, you might be able to borrow against it or take some of it.
These withdrawals are often tax-free. But if you are taking out more than the amount paid into it, you might have to pay taxes on it, just like any other income.
Types of Policies
Universal policies often have more flexibility in coverage. Some types let you adjust the death benefit, which reduces the premiums, as long as you have enough cash value to cover its costs. It can be complicated to navigate this type, so do your research to ensure you choose the right one and avoid costly mistakes. The cash value’s growth might relate to sub-accounts with your investments or indexes like the S&P 500.
Whole life policies have set premiums each month. The death benefit is guaranteed. The monthly payments do not change as time goes on, and there is a minimum rate in which the cash value accumulates. If you receive dividends from the company and put them into the cash value each month, the returns will multiply.
Guaranteed issue insurance is usually a whole life, but it only comes in relatively low coverage amounts.
It might not even be $100,000. Some have a cash value component, but there is little potential cash value because of how low the coverage amounts are. One of the advantages of this insurance type is that you can’t be rejected, so it’s a good option if you couldn’t get the right amount coverage elsewhere.
Still, you will not get a payout unless you pass away in two to three years of purchasing the policy. Since each company’s rules vary, it’s best to read the fine print before signing anything.
