“Which type of life insurance policy generates immediate cash value?” “What is the underlying concept regarding level premiums?” I get asked these questions all the time during my free life insurance consultations with my clients.
You might be surprised to know that life insurance isn’t just about providing death benefits for your family. Cash value accumulation and premium payments are two important factors you can’t afford to ignore if you want to receive the best life insurance policies.
Easier said than done. This sounds a little complicated, doesn’t it?
To help you understand everything, I created this article to explain these two gray areas when it comes to understanding permanent life insurance and term life insurance policies. In this quick read, you’ll learn what cash value means, which type of life insurance policy generates immediate cash value, and how you can make the most out of your life insurance investment earnings.
You’ll also get an answer to the question, ”what is the underlying concept regarding level premiums?” and learn how it differs from stepped premiums to help you determine which type is more suitable for your financial goals.
Let’s dive in!
What Is Term Life Insurance?
Term life insurance is a contract between you and a life insurance company. It says if you die during the specific time period your policy covers, the life insurance company will pay your family the death benefit. Most term policies last as little as one year, five years, ten years, 20 or 30 years.
So, if you die during your 20-year term policy your life insurance company will pay your family the tax-free death benefit.
However, if you don’t die, once a term life insurance policy expires (or your term is up) your life insurance expires. Unfortunately, when your policy expires your family is no longer eligible to receive the death benefit. And, you don’t get back any of your paid premiums.
After your term policy expires, if you still need life insurance, you’ll have to get new coverage at an older age and based on your current health. Since life insurance rates are based on your age and health, a policy you get when you’re older is going to cost more than when you were younger.
Nevertheless, term life insurance is still the most affordable coverage for someone who needs a lot of coverage and has a limited budget. Most people live beyond the term of their life insurance policy. Therefore, life insurance companies only pay out 1-2 percent of term policies.
What is Permanent Life Insurance?
Permanent life insurance is life insurance that doesn’t expire. Therefore, as long as you pay your premiums, your beneficiaries are guaranteed to receive the death benefit, when you die.
Unlike term life insurance, permanent life insurance policies also allow you to earn money through a cash value account. The accumulated cash is accessible while you’re alive. So, you can access tax-free income in your policy before you die.
However, permanent life insurance is much more expensive than term life insurance because it’s guaranteed to be paid out. Permanent life insurance is most affordable when you’re young and healthy.
What Is the Cash Value of a Life Insurance Policy?
The cash value of a life insurance policy is an additional insurance policy feature that allows you to invest through your coverage. Cash value accounts are usually included in permanent life insurance policies and use a percentage of your premiums to earn extra money. Your cash value account might grow through compound interest or by earning profits from external investments. It all depends on the nature of your permanent life insurance since not all policies are the same.
Which Type of Life Insurance Policy Generates Immediate Cash Value?
Most types of permanent life insurance generate immediate cash value. In most cases, your life insurance provider begins investing portions of your premiums from your first payment.
Here’s an overview of how each type of permanent life insurance generates immediate cash value for your account:
Whole Life Insurance
Whole Life Insurance or traditional life insurance helps you earn more income by adding compound interest to your cash value account. Unlike other permanent life insurance policies, Whole Life Insurance generates interest at a fixed rate for the duration of your policy.
This makes it easy to track your investment profits. However, Whole Life Insurance policy rates are typically low (about 1.5 percent – 3 percent) and can hinder your cash value growth.
What’s unique about Whole Life Insurance is that you can invest annual dividends – or premium returns – into your cash value account, which can significantly improve your cash value. Since your money increases through compound interest, you’ll receive more profits as your balance grows!
If you’re wondering which type of life insurance policy generates immediate cash value at steady interest, that would be Whole Life Insurance.
Guaranteed Acceptance Life Insurance
Guaranteed acceptance life insurance doesn’t always generate immediate cash value. It can only grow your income as a whole life insurance policy. Guaranteed life insurance investments profit in the same way as Whole Life Insurance: through compound interest. The only difference between the two permanent life insurance policies is that you don’t need to present a medical report to receive Guaranteed Life coverage.
Universal Life Insurance
Universal Life Insurance is another type of permanent life insurance. Unlike Whole Life, which offers a fixed premium and interest rate, Universal Life Insurance provides policyholders with more flexibility. To go into details, you can adjust your Universal Life Insurance premiums to suit your budget. Universal Life Insurance policies are credited cash value profits based on the current market rates stipulated by your life insurance provider.
The profits are minimal, and Universal Life Insurance does not generate a large amount of cash value. As a result, we consider it the least lucrative type of permanent life insurance.
Index Universal Life Insurance
Many policyholders consider Index Universal Life Insurance (IUL) the most profitable because it generates cash value at a flexible rate. The interest on an IUL investment account ranges from 10 percent to 12 percent — the highest rate among permanent life insurance policies.
Why is there such a great potential for earnings with IUL Insurance?
Your life insurance provider pays you interest based on the performance of their money invested in the stock market. There’s usually a cap limiting your total earnings, but even so, you could still accumulate a significant amount of money in your account over time.
Index Universal Life Insurance policies also include a 0% floor which protects you from losing income when the index plummets, so it’s not as risky as investing directly into the stock market.
Which type of life insurance policy generates immediate cash value at the greatest rate? There’s no doubt that it’s Index Universal Life Insurance.
Does Single-Premium Generate Immediate Cash Value?
Does Single-Premium Life Insurance Generate Immediate Cash Value?
Policyholders with single-premium life insurance policies agree to pay the full value of their policy up-front. As a result, the single-premium can grow your cash value income quickly because of the large sum of money invested.
Unfortunately, this policy is the least accessible type of life insurance to generate immediate cash value. Life insurance policies can be worth up to $1,000,000. The average American can’t afford to cover their policy in a single payment.
Which Type of Life Insurance Policy Does Not Generate Immediate Cash Value?
Term life insurance doesn’t generate any cash value because this type of life insurance doesn’t include an investment component. Term life insurance policies are only designed to provide coverage for a limited timeframe. Unlike permanent life insurance policies, term life insurance does not accumulate cash value.
How Can I Use the Cash Value from a Permanent Life Insurance Policy?
Most people think that permanent life insurance is only useful after the policyholder dies—that could not be further from the truth. If you own a permanent life insurance policy, you can access the funds from your cash value account while you’re alive and use them in any of the following ways:
- To serve as collateral for a personal or business loan application.
- To cover insurance premiums instead of paying out-of-pocket.
- To pay off medical bills, home renovation, a trip, or whatever you’d like.
Honestly, there are no limits to spending money from your cash value account. You earned it!
Beware, however: when you die, your life insurance provider will deduct the cash value you’ve spent from the death benefits released to your loved ones. The more money you withdraw from your cash value, the fewer funds will be left for your beneficiaries.
Can I Opt Out of the Cash Value Component of My Life Insurance Policy?
The cash value account is a standard feature of every permanent life insurance policy. Therefore, it’s not possible to exclude it from your policy. A term life insurance policy might be a better option if you’d like to receive life insurance coverage without building cash value.
Is Permanent Life Insurance Better Than Term Life Insurance?
Permanent and term life insurance serve different purposes. Permanent life insurance is best suited for people who want to increase their wealth while providing a safety net for their family’s financial needs. And it may be what you need if you’ve been wondering which type of life insurance policy generates immediate income.
On the other hand, term life insurance is ideal for those who strictly want to provide funds for their beneficiaries after they die. Term life insurance is also cheaper than permanent life insurance, so it’s something to consider if you have a low budget.
That’s not to say you can’t apply for permanent life insurance later. Many of my clients convert their term life insurance to a permanent life insurance policy once they can afford a permanent life insurance premium.
What is the Underlying Concept Regarding Level Premiums?
Level-premium is a type of life insurance where the premiums remain fixed for the policy’s lifespan. This is typical for Whole Life Insurance and some term life insurance policies.
What is the underlying concept regarding level premiums? It’s simple and strategic: You’ll pay “overcharged” premiums for the first few years of coverage, but the fees cancel out in the long run since your death risk increases while you age.
Level-premium insurance is advantageous because you get to pay a fixed price even while your coverage increases over time. It’s easy to factor level-premiums into your budget because you know exactly what your coverage will cost month after month.
What is the Difference Between Stepped vs Level Premiums?
Stepped premiums increase annually at your insurance provider’s predetermined interest rate, whereas level premiums remain at a set price for your entire policy.
Level premiums are more lucrative if you apply at an early age (because younger applicants get the lowest insurance rates when they start a life insurance policy). However, there’s minimal difference in the rates offered for a stepped- or level-premium at about age 65 because premiums are generally higher for seniors.
Should I Get Level Premiums?
Level premiums are profitable in the long run because your premium charges even out over the years. We don’t recommend them for term life insurance policies. Term life insurance only lasts for about 5 to 40 years, which doesn’t provide enough time to get returns on your high premium payments.
The underlying concept regarding level premiums is designed to support permanent life insurance policies. You should apply for stepped premiums if you want short-term insurance.
Got More Questions About Permanent and Term Life Insurance?
Life insurance coverage can be challenging to understand on your own. Luckily, my team and I at The Purpose of Money are trained to assist you in finding the right life insurance policies that cater to your needs.
Do you have more questions about which type of life insurance policy generates immediate cash value? Still wondering, “what is the underlying concept regarding level premiums?”
As a licensed life insurance producer, I’d be happy to help you understand your options between permanent and term life insurance. Book a free consultation with me today to get the full breakdown of the best life insurance policies that can grow your income while you focus on protecting your family.