| Basic Information on Cash Value Life Insurance |
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| Written by Joshua Cumrine |
| Thursday, 04 February 2010 17:30 |
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There are three different ways your premium payments are allocated within a cash value insurance policy. The first allocation is made towards the actual cost of the insurance. In all insurance, you have to remember that a specific amount of money is required in order to pay the actual cost of the insurance. In other words, what does it cost the insurance company to insure you and maintain the policy death benefit. The next allocation of your premiums payments goes towards the administrative costs of the company. It costs a certain amount of money to hold a policy on the books, and this cost is paid by the policy owner. Lastly, the remaining amount of premium payments goes directly to your cash value in the policy.
There are three different ways your premium payments are allocated within a cash value insurance policy. The first allocation is made towards the actual cost of the insurance. In all insurance, you have to remember that a specific amount of money is required in order to pay the actual cost of the insurance. In other words, what does it cost the insurance company to insure you and maintain the policy death benefit. The next allocation of your premiums payments goes towards the administrative costs of the company. It costs a certain amount of money to hold a policy on the books, and this cost is paid by the policy owner. Lastly, the remaining amount of premium payments goes directly to your cash value in the policy. Growth of the cash value We've already said that a portion of every premium payment goes toward your policy's cash value. So, it's easy to understand that the cash value of a policy will grow as additional premiums are made. The cash value of a policy may also grow because of earnings. Every type of cash value insurance policy offers different formulas on how to calculate the cash values. Whole life (or permanent insurance) offers a "guaranteed" cash value. This formula us determined by the insurance company and could vary slightly from company to company. Generally speaking though, the formula is based on the claims paying ability of the insurer. Universal life policies offer cash value accounts that follow the current interest rate values. Variable life policies allow the policy owner to choose between various sub-accounts such as stocks, bonds or other funds. As is true with other investments, the cash value in your Variable Life policy could fluctuate up or down based on the investment performance. Cash Value Premium Portion Decreases Over Time Over time, the amount that you contribute from each premium toward cash value decreases, because the cost of insuring you increases every year. The pattern is similar to what happens with a mortgage. In the early years of a home loan, you pay mostly interest; in the later years, you pay mostly principal. So for example, assume that you are paying a $25 per month premium payment. In the early stages of the policy, the cost of the insurance is relatively low because the likelihood of you dying at that age is statistically less then in later years. As you grow older, the chances increase that you will die, thus the increasing cost of insurance. The relationship between the cash value and the insurance components work opposite each other. The cash value tends to grow faster in early years since most of the premium payment is available to build the cash value. As you get older, the cost of the insurance consumes a lot of those premiums. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Learn more about finding the Best Colorado Financial Planners. Stop by Joshua Cumrine's site where you can find out all about the basics ofpermanent life insurance and what it can do for you. |