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How Your Life Insurance Can Also Be an Investment

April 24, 2013

life insuranceMost people think of life insurance that will only benefit those left behind after the policy owner dies. But there are actually benefits to certain life insurance policies that can act as an investment; a savings account that earns interest and can be used for needs during your lifetime including paying for university education, taking care of debts, or just about any other financial need.

Cash Accumulation Accounts

Cash accumulation accounts are available on certain types of life insurance policies. These are what are known as permanent life insurance, and include whole life insurance and universal life policies. In addition to having a set death benefit amount, they also include the option of a cash accumulation account. This allows you to pay both a base premium – the actual cost of your insurance – as well as an additional premium amount that goes into a special type of savings account.

The money in this account will earn interest, and also gives you tax benefits just like any other investment. As you pay your premiums each month, the amount in that account increases and continues to grow thanks to the interest rates which are often higher than you would find in a bank savings account. You can also choose to add extra money each month to the account to increase your savings.

Using Your Cash Accumulation Account Funds

The cash accumulation account becomes a part of your life insurance benefit total if you die without ever having used it. That means that upon your death, the listed beneficiary on your policy would receive both the policy value amount as well as the amount in the account, increasing the total amount of the death benefit.

The added bonus to cash accumulation accounts, however, is that you can access them during your lifetime. There are two ways to access and use the funds in your accumulation account: a surrender or a loan.

Taking out a Loan

Taking out a loan against a life insurance policy is the most common method by which people use their savings. When you take out a loan from the cash accumulation account, you do so with terms much like any other loan, by which you must repay the amount into the account by a certain date.

The biggest benefit to taking out a loan is that you can keep the tax-deferred status of the amount in the account. That means that you will not be taxed on the money as income. It also means that once you have paid back the loan you can continue to earn interest on that amount, as well as other cash put in the account from the premiums you continue to pay.

Surrendering the Account

A surrender is the second option for taking money out of the account. It is not a loan and you don’t have to pay it back. You simply take the money, empty the account, and the start over adding money to the account. When you take out the money as a surrender you will have to pay taxes on that amount since it is treated as income and not as a loan.

It’s important to note that whether you decide on a loan or a surrender, you may not be able to access all of the money, or any of it, early in the policy’s term. It takes a while for the cash to accumulate, and most policies have rules as to how much you can actually take out and when it becomes available to you as a loan or surrender.

The Other Benefit to Cash Accumulation Accounts

One of the other little-known benefits to a cash accumulation account is that it allows you to stop paying premiums for a while if things get tight financially and still keep your policy in force. You can stop paying and have your cost of insurance premium taken from the cash accumulation account for as long as there is enough to cover it.

This is an option that is not available on term policies and makes it easier to keep your insurance in force even if you go through a tough time where paying the premium becomes difficult.

The cash accumulation account on your permanent life insurance policy adds value to the policy in a number of different ways, and makes the higher premium amounts charged for this type of policy worth paying.

When obtaining life insurance quotes, understanding these types of policies that can be used as an investment will help you prioritize what to look for in a life insurance policy.

  • panzouk

    Very useful and well explained informations. Thank you very much, you just opened my eyes.

  • Rob Janzen

    Some of the information may be useful, but there is one very glaring error. The article states that the cash accumulated in the policy is included with the policy value upon death, but then goes on to explain the 2 ways to access the cash during your lifetime. 1. Take out a loan 2. Surrender the policy. If the cash belongs to you and you can leave it behind when you die, then why would you need to pay it back or surrender the policy to get at it while you are still alive? It’s your money and you should be able to get access without penalty any time. Additionally, 100% of cash value in a Whole Life Policy goes to the company that sold you the policy.

  • Rob Janzen

    The cash accumulation in a whole life policy and most UL policies is not included in the death benefit and does not get paid out to the beneficiary upon death.

  • Rob Janzen

    This is my 3rd attempt at leaving a comment on your article. I would think that you would want to provide the best and most accurate information regarding life insurance. However, there is a discrepancy regarding the cash value in a whole life policy and I believe it should be noted. The cash value will NOT be paid out to the beneficiary. Please email me at [email protected] with your reasons for not posting my comments.

  • Steve

    However there are UL policies that do pay cash accumulation plus insurance value the total monies are all paid to the benefactors named in the policy. And as far as leaving it behind if you take accumulated funds out of the policy ,then you have taken that money out of the policy value. Creating a interest charge which should be taken out before paying to benefactors.