Does life insurance accumulate cash? (sometimes!)


Does life insurance accumulate cash? (sometimes!)

Life insurance is not exactly a sexy or exciting purchase. You get to pay your premiums every month knowing full well that you will never live to see the benefit of it. Your family will, but you won’t. "What’s in it for me," the more selfish of us may ask. Well, if you purchase whole life, universal life or variable universal life insurance instead of term life insurance, there might just be a pot of gold before you reach the end of your life’s rainbow.

With universal life, variable universal life or whole life policies, part of your premiums go into an investment vehicle that builds cash value as you go along. "Great," you’re thinking, "More cash for my ungrateful survivors." That’s not the case. This money builds tax free and it’s technically your money. Most people will leave it in until it gets high enough that the interest will pay their premiums and they get essentially free life insurance for the rest of their lives, but others withdraw some of the cash, particularly in times of need. Probably the most popular option for people with these policies is to leave the cash in the investments, but borrow against it when they need money.

The bottom line is that if you want a life insurance policy that does more than, well, insure your life, they’re out there. You can get a variable universal life, whole life or universal life insurance policy that will accumulate cash for as long as you own the policy, as long as the premiums are paid.

Can I get life insurance that lasts until I die? (yes!)

When most people think about life insurance, they’re thinking about term life, which you get for a number of years, usually like 15 or 20, and it leads to an interesting dilemma at the end of the term. You find yourself thinking "Gee, I’d really like to go on living, but if I die after this term expires, my family will get nothing. Whatever should I do?" Well, don’t panic! There are solutions to this problem that don’t involve pushing over the line of Harleys in front of a biker bar the week before your term is up.

The trick is to look for something besides term life insurance. There are other types, including universal life, whole life and variable universal life that end when your life does, not when the preset term does. The idea behind these types of insurance policies is that your policy is tied to an investment, with the theory being that your investment makes money throughout the term and eventually makes enough money to fund itself, with the investment paying for your premiums later in life. Of course markets vary and this doesn’t always work perfectly, but at the very least you get to keep the policy for your whole life, even if you are paying some or all of the premium the whole time. Some of these policies will also let you borrow against the cash value of the policy.

So if you don’t plan to conveniently die within the covered period of your term life insurance policy, you might want to consider whole, universal or variable universal life insurance.

Life Insurance—How Much Is Enough?

You are probably aware of the importance of having enough life insurance coverage to h andle the financial contingencies that may affect your family in the event of your death. However, determining the necessary amount of life insurance can be complicated. One general rule of thumb is that you should have enough coverage to equal five to seven times your annual salary. However, you may want to determine the “right” amount of life insurance coverage with a careful “needs analysis,” rather than using an arbitrary formula.

The needs analysis approach incorporates an evaluation of your family’s most important financial obligations and goals. This leads to planning insurance coverage to help address mortgage debt, college expenses, and future family income, as well as to provide liquidity for meeting future estate tax liabilities.

Mortgage Debt

The first point worthy of consideration is whether your life insurance proceeds will be sufficient to help pay the remaining mortgage on your home. If you are carrying a large mortgage, you may need a sizable amount. If you own a second home, that mortgage should also be factored into the formula.

College Expenses

Many people want life insurance proceeds large enough to help cover their children’s college expenses, and possibly, graduate school. The amount needed can be roughly calculated by matching the ages of your children against projected college costs adjusted for inflation. This calculation should be revised periodically as your children get closer to college age, and it may be a good idea to be as conservative as possible when estimating long-term savings goals.

Continuing Income for Your Family

The amount of income you will need to help provide for your surviving spouse and dependents will vary greatly according to your age, health, retirement plan benefits, Social Security benefits, other assets, and your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but your spouse’s income, alone, may not be sufficient enough to cover the monthly expenses of your family’s current lifestyle. Providing a supplemental income fund can help your family maintain its st andard of living.

Estate Taxes

Life insurance has long been recognized as an effective method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. However, this use of life insurance requires qualified legal expertise to help ensure the proper results.

Existing Resources

If your current assets and retirement plan death benefits are sufficient to cover your financial needs and obligations, you may not need additional life insurance for these purposes. However, if they are inadequate, the difference between your total assets and your total needs may be funded with life insurance.

There are many factors to consider when completing a needs analysis. In addition to the areas already mentioned, some other questions you might want to address include the following:

1. How much will Social Security provide and for how long?

2. How do you “inflation-proof” your family income, so the real purchasing power of those dollars does not decrease?

3. What is the earning potential of your surviving spouse?

4. How often should you review your needs analysis?

5. How can you use life insurance to help provide retirement income?

6. How do you structure your estate to reduce the impact of estate taxes?

7. Which assets are liquid and which would not be reduced by a forced sale?

8. Which assets would you want your family to retain because of sentiment or future growth possibilities?

As you develop an insurance strategy, remember to analyze your existing policies. Calculate the additional coverage you may need based on your family’s financial obligations and any other resources, such as retirement benefits and savings. Remember, having the proper life insurance coverage can play a major role in any family’s financial protection.

This article appears courtesy of Karl Susman.  Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast.  You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116


MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

Copyright © 2011 Liberty Publishing, Inc. All Rights Reserved.

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