Happy New Year! Hopefully you’ve got some goals set to make 2013 your best year yet. This post is going to be focused on whole life insurance cash value, one piece of the whole life insurance puzzle.
Whole Life Insurance Cash Value can be looked at in two ways – but before we get into that let’s make sure we’re on the same page when it comes to how the cash value got there in the first place.
Originally, whole life insurance was more simple. A policy owner would pay a level premium throughout their life, and were guaranteed to receive a death claim. Since premiums would add up to large amounts of cash over time, insurance companies produced a policy that would offer a cash reserve which built up to the known future claim, or death benefit.
These policies were essentially designed with the guarantee that the whole life insurance cash value would equal the death benefits at maturity (originally near 100 years old, but recently changed to 121). At maturity, the policy holder would simply receive the matured value, the death benefit, or cash value, both now being equal, plus a guaranteed minimum interest rate.
Two Important Characteristics of Cash Value
First, whole life insurance cash value is an asset. It’s something you own. Just like selling any other asset (gold, silver, real estate), you can liquidate the cash value of your whole life insurance policy. In doing so, you cancel your policy, and that equity you have built will be returned to you by the insurance company. Since whole life insurance is a contract between you and the insurance carrier, at any point throughout the life of the policy you have the right and option to walk away, and receive any and all cash value that has been accumulated.
Secondly, it represents the money you can loan against, or the collateral you now have. By contract with the insurance company, whole life insurance cash value can be collateralized at your discretion, up to the amount you have in cash value. Each carrier differs in when and how you can collateralize this cash value, but most allow it early, and for as long as you have the policy. To be able to use whole life insurance as a bank, like the Infinite Banking Concept suggests, you will want to use proper insurance companies to allow for immediate access.
(If you’re unfamiliar with how loans from a life insurance policy work check out our policy loans article.)
Early Cash Value
Among the many variations of whole life insurance is the high early cash value. A policy owner that wants early cash value can structure a policy to have cash value today, in order to be able to maximize returns, as well as have access to money inside the policy.
Lorillia|Your Money Mentor February 11, 2013 at 11:45 am
Now-a-days most of the life insurance policies sold are cash value policies. But before reading your article , I do not understand how policy loans works!! I visited the link”policy loans article”. I will also make a whole life insurance as It will help me retire wealthy.
@Nick, What do you think about Variable and Index life insurance? I am looking to your reply.
Nick D. February 11, 2013 at 12:15 pm
Glad I could clear that up for you Lorillia!
Regarding Variable and Indexed Universal Life…..wow, where to start.
Universal life is a very confusing, technical product that the majority of life insurance agents don’t even understand. One of the issues I have with it is that fact that every year your cost of insurance increases. So, as you get older the cost of the policy increases. Early on this won’t cause too many problems but once you get into your 50s, 60s and 70s the cost of insurance can start eating away at your cash value.
Might be easiest to head over to our podcast page as we recently did a couple of podcasts with Universal Life Experts – head over to the podcast page and check podcasts # 2 and #3.