| Cash Value Insurance Basics |
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| Written by Joshua Cumrine |
| Saturday, 06 February 2010 18:31 |
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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. How does my cash value grow 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. Whole life policies offer "guaranteed" cash value accounts that increase based on a formula determined by the insurance company. (Guarantees are subject to the claims-paying ability of the insurer.) Universal life policies offer cash value accounts that track current interest rates. Variable life policies allow their owners to invest in accounts that operate like mutual funds, meaning that their cash value accounts can be invested in bond, stock, and other funds, known as sub-accounts. The cash value will grow or decline based on the performance of the underlying sub-accounts. 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. As an example, assume if you will that you are paying a $25 per month premium. Throughout the early years of the policy, the cost of the insurance is relatively low, because you are less likely to die prematurely. As you grow older, the chances are increasing every year that you will die, therefore the cost of insurance is also increasing. 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. Looking to find the best deal on Northern Colorado Financial Planning, then visit www.joshuacumrine.com to find the best advice on permanent life insurance plan for you. |