The Rock Insurance Minnesota:
Whole Life Insurance Minnesota
What is Whole Life Insurance?
Most consumers are at least aware of the existence of whole life insurance. For quite a few decades, whole life policies dominated the life insurance market across the country.
When you buy any whole life policy, you typically would pay fixed premiums for the rest of your life, or just as long as you want the policy to be in force. In exchange for that fixed premium, you would have the promise of the insurance company to pay out a determined benefit should you die.
On top of providing that death benefit, it’s sometimes possible for a whole life policy to actually build up in cash value, and that accumulates in a tax-deferred manner. A portion of the premium pays the policy’s protection element, and the rest gets invested into the general portfolio of the company. The insurance provider actually pays a guaranteed rate of return from the premium portion in its investment portfolio, and that’s what builds up the policy value over time.
Take note of the fact that guarantees are unfortunately contingent on the financial health and ability to pay claims of the insurance provider.
Since the cash value builds up over time, the premiums of most whole life policies typically get to stay fixed, rather than escalate to match the growing risk of death as the insured party ages. Since the cash value is always growing, the insurance company’s risk actually declines.
Even though the policy cash value is ‘your’ money, you aren’t able to run to the bank and withdraw it as you need like a savings account, although you should have some limited access to these funds. Your options vary by contract but typically include taking out funds you need as a loan set against the policy or just surrendering the policy for its full accumulated cash value.
Existing federal tax rules mean that loans are usually going to be free of any current income tax, provided the policy stays in effect until the death of the insured party, the policy doesn’t mature or lapse, and isn’t a modified endowment contract. This all assumes the loan is eventually satisfied from a death that free of income tax. Withdrawals and loans do reduce the cash value of the policy, as well as the death benefit, so they do increase the odds that the policy could lapse. If a policy is surrendered, becomes any modified endowment, matures, or lapses, then the loan balance is typically viewed as having been distributed, where it becomes taxable under any general rules covering the distribution of policy cash values. There might be need for additional payments out of pocket if there is a decrease in either investment returns or actual dividends, if you take out any loan, if current charges go up, or if you withdraw any policy values.
You need to know that on top of charging modest interest rates for any loans taken out against a policy, your insurance provider might pay out a lower return rate for the cash value that portion you borrow. On the other hand, loans taken out against an insurance policy value are typically not taxable and are able to provide you cash that can help out with expenses you weren’t expecting.
The cash value of your life insurance policy will accumulate in a tax-deferred state, but should you surrender the policy, you’d then incur income tax liability for any funds in excess of the premiums you have already paid.
The case of whole life policies having fixed death benefits with fixed premiums can be a blessing or a curse, often contingent upon your personal circumstances. For some families, it’s just one thing they no longer have to worry about. They know ahead of time what they have to pay for their premiums, and they know just what their death benefits are going to be.
For others, a whole life policy simply doesn’t offer enough flexibility. If situations change, it’s unlikely that they can ever make their death benefits or premiums go up or down on a whole life policy, short of surrendering the policy and buying a new one.
The availability and cost of life insurance will depend on various factors, like health, age, and the kind and amount of the insurance purchased. Like most other financial decisions, the purchase of a life insurance policy has expenses associated with it. Policies typically have expense and mortality charges. Additionally, a policy that gets prematurely surrendered might have specific charges associated with it, as well as income tax implications. If you’re thinking about buying life insurance, make sure you give us a call so that we can help you explore what options you have. We service a large area of Minnesota including Burnsville, Brooklyn Park, and Maple Grove.