When it comes to specially designed whole life insurance policies designed for cash accumulation, you hear us talk about the cash value as well as the death benefit. A question that we’ll often get at the death of the insured is, “Are both the death benefit and the cash value, paid out to the named beneficiary?”
Have you ever wondered how the living benefits and the death benefits work in a whole life insurance policy? Let’s take a step back and look at how.
With a regular, whole life insurance policy that insurance company is making you two promises. The first is to pay out a death benefit when the insured dies, assuming that the policy is in force. The second is to have a cash value that’s equal to the death benefit at the age of maturity, which is typically age 100 or 121.
So in order to keep that second promise, these policies are actuarially designed to get better and better from a cash value perspective each and every single year because the insurance company needs to stash more and more money away in order to meet that second promise.
So think of it like this, the insurance company is amortizing your mortality costs until age 100 or age 121. As they’re putting that money away to fulfill this second promise, they’re filling up that policy with equity. And that equity becomes cash value that you can borrow against.
If you’re looking at a life insurance policy illustration, you’ll see this under the guaranteed values. You’ll see a guaranteed cash value guaranteed by the insurance company as well as a guaranteed death benefit. With these numbers and these values, this is the worst-case scenario.
You see, your obligation as the policy owner is only one. It’s to pay the premiums the insurance company is responsible for making and meeting all of the other promises within this unilateral contract.
So let’s transition into, how the cash value and the death benefit relate. And the fact of the matter is, it is all baked into the same cake. The death benefit might be $150,000. And when you die, the cash value might be $60,000, but all you’re going to get as far as a death benefit is the $150,000. Why? Because the insurance company puts that money away over that time period to make sure that if you make it to age 100 or age 121, they’re going to have $150,000 in cash waiting for you.
Think of it like this. The cash value in the cash value accessibility through that policy loan provision is a living benefit at death, you get the death benefit and the living benefit ceases.
Another question that makes sense to ask is, “What if there’s a policy loan against my cash value at the time the insured dies? What happens then?” Basically, what will happen is the insurance company will calculate the death benefit, 150,000. And let’s assume you have a $30,000 loan against the policy at the time of your death. They subtract that 30,000 from the 150,000 and your net death benefit is 120,000.
So we often get the question, why don’t I get the death benefit plus the cash value? Certainly, there are some “financial gurus” out there saying, “Hey, the problem with whole life is you don’t get the cash value and the death benefit.” Duh. No, you don’t.
If you have a mortgage against your house, let’s say the house is worth $300,000 and you have a $200,000 mortgage against the house. If you go to sell the house, you don’t get the 300,000 plus the 200,000. What happens is the buyer pays $300,000, your net is 100,000. And so it is with life insurance. If you die with a $150,000 death benefit and $50,000 of cash, you get the 150 death benefit. You don’t get the 150 plus the cash.
If you’d like to get started with a specially designed whole life insurance policy designed for cash accumulation so that you’re able to take advantage of the living benefits as well as the death benefit included in this whole life insurance policy, feel free to hop on our calendar with schedule the Strategy Session button. Or if you’d like to learn more about exactly how we put this process to work for our clients, check out our free web course right on the homepage, 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.
