The face value of a life insurance policy is the death benefit. That value was agreed upon at some point based on several personal factors. The most significant factor in the face value of the policy is the monthly payment.
Besides the face value of the policy, life insurance plans often have a cash value. Whole life or Universal life coverage both offer cash value components to their life insurance policies. Beyond the benefit, there is a way to get money from your life insurance. The cash value of the policy, or the money from a loan, are both great ways to maintain a tax-free income during retirement.
Permanent Life Insurance and the Cash Value
You can choose from a few types of permanent coverage, all of which have a cash value. Each type of coverage is different and has different effects on the cash value.
For example, the cash value will change if more insurance is purchased or the policy is reduced to make for easier monthly payments. As the amount in the cash value component of the Life Insurance Retirement Plan (or LIRP) increases, so does its growth.
Different types of coverage are better for different people. If finding the best way to remain covered and still retire comfortably is overwhelming, contact the professionals at Matador Insurance. Their years of experience guiding people through retirement planning have positioned them as trusted experts when it comes to retirement investments.
Whole Life Insurance
Whole life coverage is a type of permanent life insurance. Whole life insurance specifically states that as long as the monthly agreed-upon premiums are paid upon the insured individual’s death, the beneficiaries will receive the face value of the policy. This means that there is 100% guarantee of a payout with whole life policies, making them a little pricier than other types of life insurance.
The cash value of a whole life insurance plan is related to the payment premium. As time passes, more and more value is added to a savings account within the policy. This is a great asset in an emergency, and if you need a sum of money, you can either withdraw or borrow against your life insurance account.
When taking out a loan against the policy’s cash value, a borrower can only take up to the cash value amount without owing taxes. Past the cash value amount for the policy, the insured person would owe taxes on that income.
Universal life insurance is another type of permanent life insurance. Universal life insurance also has a cash value component. The key difference between this and other plans is that Universal life insurance is built with more flexibility than other permanent coverage.
When you pay for a universal life insurance policy, you can pay extra each month if you have the money, which will go toward the cash value of your LIRP. The key is that you have the option to pay that extra premium. Of course, if you don’t pay extra, that’s fine too.
What happens when you make a payment beyond the minimum is also different from other permanent life insurance plans. After deducting the costs of the policy from the payment, the rest is given back to the insured person in the investment of their choice.
When those investments yield returns, they go into the policy’s cash value. At that point, they’re essentially the same as a whole life policy’s cash value component. You can withdraw the money or borrow against it tax-free up to what you’ve put in.
The main difference is that, even though universal life insurance is considered permanent insurance, it can be customized to last for fifteen years or your whole life. The options you have when creating a universal life insurance policy allow for a precise plan that suits an individual’s needs.
The biggest difference, though, is that sometimes the cash payout is not paid because the insured individual didn’t die during the policy period. Thus, the face value would be zero.
Which is Better?
The truth is that it depends. Either whole life insurance or universal coverage are valid choices for retiring with your life insurance plan.
Universal life insurance provides flexibility for an individual, ensuring that they have the coverage that works for them and a cash value that they can contribute to if they choose. On the other hand, whole life insurance seems like a stronger plan, with a larger overall cash component, but if the policy goes unpaid, it ends.
Matador insurance has years of experience helping individuals find the coverage they need. Not only does life insurance provide security for the family, but it’s also a valuable option for retirement. Talk about your situation and what you envision for your retirement with a professional at Matador Insurance to get started today.