The primary objective of personal life insurance is to provide final expenses and protect beneficiaries from an income loss or debt burden in the event of a family member’s death. However, permanent life insurance policies build cash values that can be tapped for use at retirement or if an emergency arises. Whole life and variable universal life (VUL), if properly funded, both deliver the means to accumulate cash that can be accessed when needed via policy loan provisions or direct withdrawals.
Whole Life Policies
Whole life policies are typically among the most expensive policies to purchase. The cost of insurance is determined by the age and health of the applicant. Tobacco use also increases premiums charged for coverage. As a rule of thumb, younger policyholders pay smaller premiums than older insureds. A 25-year-old male nonsmoker might pay about $900 annually for a policy with a $100,000 death benefit, whereas a 40-year-old male smoker might expect to pay $1,800 per year for the same face amount. Part of the annual premium charged is applied toward the pure cost of insurance, commissions and administrative costs, while the balance is left to grow at fixed interest rates determined by the issuer.
In the first few years of a whole life policy, cash values accumulate slowly. It takes several years, with interest rates at historic lows in 2016, to reach a breakeven point, when total premiums paid equals the cash surrender value of the policy. At any point in time, however, the equity in the policy can be accessed by loan or by withdrawal. Level premiums established at the time of issuance may also be enhanced by the payment of dividends from a mutual insurance company whose policyholders share in ownership.
In addition, some policies offer paid-up additional insurance options that allow policyholders to contribute additional dollars, increasing the death benefit and earning interest. Unabated, whole life cash values can grow to considerable sums, largely dependent on the number of years that premiums are paid and the internal rate of return offered by the insurance carrier.
Variable Universal Life
Policyholders with an appetite for risk can opt for a VUL policy. These contracts allow flexible payments and offer the availability of a separate account in which premiums are invested in mutual funds. Unlike whole life policies, cash values invested in the separate account are neither fixed nor backed by the financial strength of the insurer. Rather, funds directed toward mutual fund sub-accounts are subject to investment risk. The primary advantage of VUL policies stems from participation in equity or debt markets, which, over time, may outperform fixed rates determined by the insurance company.
Compared to whole life policies that may credit premiums with a 4% interest rate, cash values grow faster in a VUL equity portfolio that annually averages a 7% return over the life of the policy. A 30-year-old female nonsmoker can contribute $100 per month to a whole life or VUL policy for 35 years. The difference in accumulated cash value is substantial if the VUL sub-accounts manage to outpace the fixed interest rate credited to whole life premiums.
Without considering policy and insurance costs, the difference in accumulated value of regular $100 monthly contributions over a 35-year period would amount to more than $85,000 if the VUL portfolio averaged a 7% return, while the fixed option averaged 4%. Lengthy time horizons and moderate risk tolerances behoove policyholders who wish to utilize VUL policies as a supplemental cash-accumulation vehicle.
- Permanent life insurance policies are designed to pay a death benefit. Such policies are not marketed as savings or retirement funding vehicles. However, cash values subject to fixed rates or favorable investment returns may adequately complement individual retirement accounts (IRA) or non-qualified deposits accounts, providing liquidity and income when needed.