The primary goal of personal life insurance is to cover final expenses and protect beneficiaries from a loss of income or debt burden in the event of a family member's death. Permanent life insurance policies, however, build cash values that can be used for retirement or emergency use. Whole life and variable universal life (VUL), if properly funded, offer the opportunity to accumulate cash that can be accessed as needed through policy loans or direct withdrawals.
Whole life policies
Life insurance policies tend to be among the most expensive policies to purchase. The cost of insurance is based on the age and health of the applicant. Tobacco use also increases premiums charged for coverage. As a rule of thumb, younger policyholders pay lower premiums than older policyholders. A 25-year-old male nonsmoker might pay about $900 per year for a $100, 000 death benefit policy, whereas a 40-year-old male smoker might expect to pay $1, 800 per year for the same face amount. A portion of the annual premium is applied to the pure cost of insurance, commissions and administrative expenses, while the balance is allowed to grow at fixed rates determined by the issuer.
Cash values accumulate slowly in the first few years of a whole life policy's life. It takes several years for interest rates at historic lows in 2016 to reach a break-even point when total premiums paid equal the cash surrender value of the policy. At any point, however, the equity in the policy can be acquired through credit or withdrawal. Premium rates set at the time of issuance may also be increased by the payment of dividends from a mutual insurance company whose policyholders have an interest in the property.
In addition, some policies offer paid additional coverage options that allow policyholders to contribute additional dollars, increase death benefits and earn interest. Unchanged, whole life cash values can grow to substantial sums, depending largely on the number of premium years and the internal rate of return offered by the insurer.
Variable universal life
Policyholders with an appetite for risk can opt for a VUL policy. These policies allow flexible payments and offer the option of a separate account in which premiums are invested in mutual funds. Unlike whole life insurance, the cash values invested in the separate account are neither fixed nor backed by the insurer's financial strength. Rather, funds directed to mutual fund subfunds are subject to investment risk. The primary benefit of VUL policies is participation in equity or bond markets, which over time can exceed the fixed rates set by the insurance company.
Compared to whole life policies, which can credit premiums at a 4% interest rate, cash values grow faster in a VUL equity portfolio that averages 7% returns over the life of the policy. A 30-year-old nonsmoker can contribute $100 per month for 35 years for a whole life or VUL policy. The difference in accumulated cash values is substantial if the VUL subaccounts manage to exceed the fixed interest rates credited to the whole life premiums.
Excluding insurance and policy expenses, the difference in the cumulative value of regular monthly $100 contributions over a 35-year period would exceed $85.000 if the VUL portfolio were to earn an average 7% rate of return. %. Long time horizons and moderate risk tolerances apply to policyholders who want to use VUL policies as an additional cash accumulation vehicle.
Key impressions
Permanent life insurance policies are designed to pay death benefits. Such policies are not marketed as savings or pension funds. However, cash values subject to fixed interest rates or favorable investment returns can adequately supplement individual retirement accounts (IRAs) or accounts of nonqualified deposits and provide liquidity and income when needed.