Unlike term life insurance, which
buys you the maximum amount of coverage for the least amount of cash over a
fixed term of years, "cash value" or "permanent" life
insurance can last your lifetime. It costs more because a portion of your
annual premium is used to pay "mortality costs" (the actual cost of
the life insurance) and expenses, while the balance grows tax-free inside the
policy.
That excess money can be borrowed or
withdrawn through a policy loan. Interest is charged on the amount withdrawn.
And if you die without repaying the loan, the death benefit (the amount paid to
your beneficiaries) is reduced by the amount of the loan.
The money inside the policy can grow
in a variety of ways, depending on the design of the policy, either through a
promised minimum interest rate or through your choice of mutual fund-like
investments inside the policy, or even through dividends declared by some
insurance companies.
With all these variables, it is more
complicated to buy a cash-value life insurance policy. Here are five questions
you might want to ask before buying:
1. Do you guarantee
that, as long as I pay this premium, the insurance will stay in force and not
lapse -- no matter how long I live? Note the use of the word
"guarantee." That's important. Some policies will
"illustrate" that there will be enough cash growing inside the policy
to keep it in force until age 100 -- or even until age 121. But an illustration
is not a guarantee! Getting that no-lapse guarantee may require paying a higher
premium or buying a policy with that feature.
2. Can I prepay premiums to ensure
that the policy stays in force? You might not want to be paying premiums later
in life, though you still have a need for life
insurance plans. Many policies allow you to put "extra" cash into
the policy in the early years, giving the money a longer time to grow and
making it available to pay premiums in later years. You might put in enough to
have a "paid-up" policy, guaranteed to last to age 121. Again, you
want a guarantee.
3. Does it have a waiver of premium?
This means the insurance company will pay your premium for you if you become
totally disabled, typically for over six months.
4. Does this policy offer living
benefits? Some policies allow you to access a portion of your death benefit
early if you are terminally ill. (Doing so obviously reduces the amount you'll
leave to your heirs.) Others allow you to access the death benefit to pay for
long-term care. Check the terms of these "riders."
5. How are policy loans calculated?
On most policies there are two cash-value numbers -- the accumulation value and
the cash surrender value, which subtracts any charges or penalties for
withdrawals. Typically, you can withdraw about 90 percent of the surrender
value, but if the loan interest ever exceeds this amount you can be asked to
pay down the loan.
These are just some of the basic
questions to ask. Also consider who should be the owner, and who should be the
beneficiary of the policy. An irrevocable trust can keep the proceeds out of
your estate. A different trust should be set up to handle money for children
who are beneficiaries.
Always ask what is guaranteed (as
opposed to "illustrated" or "likely") and be willing to pay
for that promise. Life insurance is not supposed to be an investment bet, but a
sure thing. So you want to make sure it stays in force as long as you live. And
that's the Savage Truth
[Source: http://www.chicagotribune.com/business/sns-201506191900--tms--savagectnts-a20150621-20150621-column.html]
