Should I cancel my whole life insurance savings plan? If I do, how do I minimize losses?
UPDATED: Jun 3, 2013
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Asked June 3, 2013
Using a savings account to generate a life insurance premium is redundant thinking. Instead of putting your money into a separate account, put it into the policy itself, building a cash value in the policy that earns interest in a manner similar to the savings account. In this way, your life insurance policy can be setup to generate the money need for premiums automatically, saving you from having to make regular premium payments. You may be penalized for closing a life insurance savings account, but the costs can only increase over time if you decide not to cancel the account now.
The primary thing anyone should be looking for in a life insurance policy is to benefit, or at least minimize the costs, for the people you leave behind when you die. Life insurance policies can be set up to pay off a mortgage, pay for college tuition, or many other things, or it can be set up to pay out to the beneficiaries of your choice. Whole life insurance is fairly flexible and provides an affordable method of providing for your surviving loved ones.
Typically, the savings plan associated with a whole life insurance policy is derived from accrued cash value in the policy. As you make your premiums, a portion of the money you pay in goes into the cash value of the policy, then begins to earn interest over time. In this way, the longer you keep the policy if force, the more accrued value you will be able to make use of at your own discretion. Since the money actually belongs to you, you can even borrow against the cash value without a credit check or putting up collateral for the loan.
Cash value is different than face value. The face value of a policy is the minimum amount it will pay if you die, and the face value can never be reduced. The cash value is the accrued value above the face value that you have built into the policy. This value can be incredibly high or reach a zero value. With most whole life policies, you cannot actually lose money, even when the policy investments perform poorly, but you can be left with nothing above the face value you purchased the policy for.
Answered June 3, 2013 by Anonymous