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Life insurance with cash value
Life insurance with cash value? For some people, taking out life insurance means shopping around to get the most cover for the lowest monthly premium. However, a life insurance policy can also act as an investment, providing the opportunity to squirrel away money.
There are two main different types of life insurance - term and whole of life. Term insurance is far cheaper and pays out the life cover if the insured dies within the policy term. However, term cover is very basic and does not usually offer any extra benefits - there is no maturity or cash-in value; the policy either pays out the sum assured or expires.
Whole of life (WOL) policies are very different and applying for one means making far more decisions. A WOL policy is more expensive because it guarantees that the life cover will be paid out at some point, providing the premiums are paid. However, as well as having a guaranteed payout WOL policies usually also have an investment element which means that over time, the policy acquires a cash-in value (that's why is called life insurance with cash value), with some offering the facility to make withdrawals from the fund.
Anyone hoping to make whopping gains from the investment element of this type of policy is likely to be disappointed, as the primary aim of the policy is insurance. And certainly, in the earlier years especially, any value which has built up is likely to be insignificant.
However, depending on the type of funds the policy in invested into, it is possible to build up a substantial value as the years pass, providing a savings element to the policy. However, just like any other kind of investment in the stock market, values can go up and down, life insurance with cash value are not guaranteed like a savings account.
Whilst the funds will be managed by the insurance company, when the policy is taken out, the policyholder`s attitude to risk should be discussed. This will determine whether the investment is geared towards low, medium or high risk funds. However, generally speaking, it is possible to switch funds after the issue of the policy, although some companies may set restrictions on the number of switches that can take place before charges apply.
One of the other advantages to a life insurance with cash value is that some providers allow policy holders to either withdraw some funds - there are usually prescribed limits - or take a loan against the value of the policy.
There are usually different ways in which the premiums can be paid on a WOL policy. It is possible to pay the lifetime premiums on a policy with a single premium but few people have this amount of cash available to pay for insurance.
Other options include paying higher premiums earlier on but having the option to cease paying premiums at a certain age - for example 70 years old - built into the plan without losing the payout.
The other basis for premium payment is maximum cover which refers to taking out the maximum amount of cover for the lowest premium possible. With this, the premium level must be reviewed every few years to ensure it remains sufficient to maintain the benefits. Premiums are generally expected to increase significantly in later years if this option is chosen.
WOL contracts are unlike other insurance policies as the premium is not a simple calculation. For term policies, the insurer simply calculates how much the cover will cost and this is what the insured pays. For WOL, there is a minimum cost, but the insured can pay more to build up their investment value and also protect against the possibility of greater hikes in the future.
Most policyholders opt to pay their premiums monthly, but it is usually possible to also pay quarterly or annually. The most popular option is direct debit but many firms also accept debit and credit card payments, allowing policyholders to ring up and make payment over the phone with their Barclays credit card for example.