Life Insurance Savings Plan

Eric Van Haaften Permanent Life Insurance

Did you know that life insurance savings accounts can be a great way to save for short-term and long-term financial goals?

Not only does it provide peace of mind and financial security, but life insurance with a savings component also provides a decent return on investment.

With so many benefits, investing in a life insurance savings plan is an appealing choice for anyone interested in increasing their long-term wealth and protecting their assets at the same time.

We will look at all the advantages of investing in such an account, including how it works, tax benefits, and more.

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What is a Life Insurance Savings Account?

Most people are familiar with a savings account that you get from a bank.

A life insurance savings account refers to the cash value inside of a permanent life insurance policy.

When you pay the premium for a cash-value life insurance policy, a part of it covers the cost of insurance while the other portion is invested into your policy’s cash value.

When comparing life insurance versus a savings account, knowing how various permanent life insurance plans work and can benefit you is essential.

Universal Life Insurance Savings Plan

Universal life insurance is one of the most versatile and powerful types of permanent coverage available.

Universal life combines flexibility and protection with a long-term savings vehicle that many people find appealing in today’s uncertain economic climate.

It allows you to combine guaranteed death benefits protection with tax-deferred cash values, giving you more options than traditional term insurance policies provide.

We will explore the various programs available today so that you can decide which type best suits your needs and savings goals.

Guaranteed Universal Life insurance

A guaranteed universal life insurance policy has a fluctuating cash value and provides a no-lapse guarantee on both the premium and death benefit.

GUL policies are typically the least expensive and have the smallest amount of cash-value accumulation of any universal life insurance.

These affordable permanent policies are popular with people only looking for an inexpensive death benefit, not cash value accumulation.

Indexed Universal Life insurance

An indexed universal life insurance policy permits you to allocate your cash value to fixed or various well-known indexes, such as the Dow Jones, S&P 500, and the NASDAQ.

Your premiums are not directly invested in the stock market; instead, insurers connect IUL cash value growth to a stock market index’s performance over a period of time.

The insurance company may set floors and caps so your losses and gains will not entirely reflect the stock market’s performance.

That means you generally will not lose any money in an IUL insurance plan because of the floor. Yet, the amount you can earn may also be limited or capped.

They are often sold as safe investments, and many believe indexed universal life always provides high returns.

In actuality, there can be wide variation in the growth rates that different IUL policies achieve.

Variable Universal Life insurance

A variable universal life insurance policy provides a fixed premium and death benefit with cash values invested in a series of sub-accounts where you can grow or lose money depending on the market.

Your life insurance savings are tied to investments, such as stocks and bonds, making it an excellent option for those who want better earnings potential.

Whole Life Insurance Savings Plan

Do you want to make sure that there is money available in case of emergencies and other unexpected situations?

Whole-life policies have a guaranteed savings account inside the policy featuring additional benefits like tax-deferred growth opportunities and cash access options while you are still alive.

Whole life is the most prominent and safest form of permanent coverage, offering a fixed premium and death benefit for your lifetime.

It is considered the safest because the cash value savings account grows at a guaranteed fixed rate that the insurance company determines.

Many whole-life policies are sold by mutual insurance companies and are considered participating, meaning that you can also receive dividends.

Mutual insurance companies are owned by their policyholders and may pay you an annual dividend when their profits are better than expected.

According to Investopedia, Northwestern Mutual, New York Life, and Penn Mutual offer some of the best-participating policies with a good dividend history.

Penn Mutual was Investopedia’s best whole life insurance company for dividends in 2023 because of its history of paying annual dividends at over 6.00%.

Dividends can be taken as cash, added to your cash value, used to pay premiums, or buy paid-up additions to your life insurance policy.

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Accessing Your Life insurance Savings

Are you looking for a way to unlock the cash value of your life insurance policy?

Knowing the best way to access your policy’s cash value is often one of the most overlooked financial strategies.

Understanding how your life insurance policy works and taking advantage of its benefits is wise, especially when using the money saved through premiums.

Accessing Your Cash Values With a Policy Loan

The easiest method to access your cash value is to take out a loan against your existing IUL or whole-life policy.

Requesting a policy loan is easy and does not require a credit check because you are borrowing your own money.

You will be responsible for paying back any loans you receive, and your loan will grow at an interest rate determined by your insurance company and current interest rates.

If you do not repay the loan before death, the insurer will deduct the outstanding loan amount and interest from the death benefit.

When you take out a loan against your insurance policy, your cash value is used as collateral instead of other investments.

Policy loan interest rates are lower than bank loans because insurers understand that it can easily take the collateral if you do not make payments.

The best thing about taking out a policy loan is that it does not interrupt the compounding interest inside your policy!

Because policy loans are liquid, they can help with significant personal expenses such as car purchases, medical bills, unemployment income, home repairs, and retirement income.

Withdraw funds from the cash value

You can also access savings by withdrawing from your universal or whole life insurance policy.

Remember that any withdrawal above your basis is considered an investment gain and treated as taxable income.

We recommend policy loans when your cash-value savings account has accumulated in value.

Similarly to policy loans, when you withdraw from your policy, it reduces the death benefit paid to your beneficiaries.

Surrendering to Access your Cash Value

A last resort option for accessing your life insurance savings account is surrendering your policy.

When you surrender your policy, it cancels your coverage and should only be done if you no longer need your death benefit.

Upon surrendering your policy, you will receive cash value savings minus any surrender charge, outstanding loans, and premiums.

Is a Life insurance Savings Plan for You?

Finding the right type of life insurance policy is essential if you’re looking for savings and growth potential.

An adequately funded cash value policy is best for younger couples who have already maxed out their retirement account contributions.

It is not a get-rich-quick investment because cash values grow slowly and take several years of accumulation to work correctly.

According to Nerd Wallet, a savings account inside permanent life insurance is good for affluent people as part of a diversified investment portfolio.

The Infinite Banking System and Life Insurance Retirement Plans advocate overfunding life insurance to create a cash-rich savings account.

Nevertheless, permanent life insurance is expensive, making it difficult to justify unless you have sufficient disposable income to continue funding your premiums.

Many policyholders fall on hard times and are forced to surrender their policy and could lose out on a portion of their savings because of surrender charges.

If money is not taken by either loan or withdrawal before your death, the insurer keeps the cash value inside the policy and does not get paid to your beneficiaries.

Regardless, your beneficiaries will get your tax-free death benefit which should be much larger than your accumulated savings.

If you are unsure about your future income potential and do not have a longer time horizon, you would be better served to buy term insurance and invest in more liquid mutual funds.