Traditional whole life insurance policies are paid for your whole life, whether that’s age 85, 100 or 121. But sometimes people want to stop paying the premiums at one point and they’re wondering what options they have to maintain some of the benefits of the policy without surrendering.
When a whole life insurance policy is issued, the insurance company is making you two promises. Number one is to pay the death benefit when the insured dies anywhere along the line, as long as that policy is in-force. And the second promise is that at the age of maturity, usually age 100 or 121, there’ll be a cash value equal to the face amount or death benefit of the policy available for the policy owner.
So in order for the insurance company to fulfill that second promise, they have to allow cash to build up. And it’s that cash that builds up that helps them to fulfill the second promise and more importantly, provide some other additional benefits that you can get by accessing that money.
Now, the cash surrender value isn’t just some number that’s pulled out of the air. Actuaries work with the insurance company to determine what the cash surrender value needs to be at minimum, every single year, throughout the contracts life.
Think of the cash surrender value as literally what the life insurance company is willing to pay you to walk away from the death benefit and all the other benefits.
Because of the whole life insurance policy design. These policies get better and better every single year.
In the beginning, there’s not a lot of cash accumulation because there’s a lot of costs that come with getting these policies issued. But as the policy matures, the cash value is going to grow more and more every single year. By building up that cash value within the policy, it gives the policyholders some options and they’re called non-forfeiture options.
Traditionally, there are three non-forfeiture options in most life insurance policies.
First is cash surrender. Again, what the insurance company is willing to pay you to walk away from the policy.
Second is extended term. And what does that mean? Basically, if you take the original face amount of the policy, the extended term would take that original death benefit for the face amount and extend it for as long as the cash value will buy that amount of term insurance.
For example, if you had a $125,000 death benefit, you might have, let’s say, in the ninth year, an extended term value for nine years and seven months. What that means is you don’t have to make another payment on the policy. And for the next nine years and seven months, you’ll have a $125,000 death benefit without having to make another payment.
And the third option is what’s referred to as a reduced paid-up. If we use the example of a $125,000 original policy death benefit, the reduced paid-up anywhere along the way might be $73,250. And what that means is you stop paying the premiums. The policy is paid up, but it’s not 125,000. It’s 70-some thousand. And as that policy grows and matures and more and more cash value builds up, that reduced paid-up amount will increase.
What these options allow the policyholder to do is to walk away from the commitment of paying that premium. And in the case of extended term or reduced paid-up, they’re able to maintain parts of that coverage for an extended period of time. The point is there are options and they will vary between policy to policy.
If you’d like to get started with learning more about the options or start a whole life insurance policy designed for cash accumulation, be sure to visit our website at Tier1Capital.com to get started today. Feel free to schedule your free strategy session today to get started.
if you’re ready to get started or if you’d like to learn more about how our process works, check out our webinar, The Four Steps to Financial Freedom
And remember, it’s not how much money you make. It’s how much money you keep that really matters.