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Whole Life Insurance Death Benefits

Whole Life Insurance Death Benefits Posted on December 30, 2014Leave a comment

One of the key features of a whole life insurance policy is a guaranteed death benefit. The beneficiary will receive a fixed amount of cash as stated by the terms of the insurance policy no matter the age of the insured when he dies.

However, when you die your beneficiaries will receive the death benefit only. Any money in the cash value account goes to the insurance company, which uses it to lower the amount of death benefit it has to pay. The face value of a policy is the amount of money your beneficiary will be paid following your death — minus any unpaid premiums or outstanding loan balances taken against the cash value account. Depending on how long the policy has been in force before your death, your beneficiaries may get both death benefits and a return on the investment portion of the policy. Like other investments, dividends are not guaranteed.

Cash Value

A traditional whole life policy builds cash value, making it a type of investment. However, you have no way of calculating a policy’s future investment potential. Cash value is the amount of money your insurance policy has earned if you give up the policy before the maturity date or your death. It reflects the total amount of premiums you’ve paid. You can either collect any savings when you surrender the policy or keep the policy and borrow against the cash value account. Borrowing against the account reduces the death benefit. Some insurance companies charge penalties and fees when you borrow or withdraw from a whole life policy. These costs reduce the death benefit even more.

Loans Against the Policy

Once a whole life policy begins to build cash value, you can withdraw money from the account or borrow against the policy. This type of loan requires no credit check or other conditions for you to qualify. Loans you take against the policy accrue interest, decreasing the cash value of the policy. The amount of interest plus the outstanding balance of the loan you haven’t paid back each decrease the death benefit.

Premiums

Whole life insurance offers a fixed premium guaranteed never to increase. The owner of the policy must continue to pay the full premiums for the person named in the policy to remain insured. If you stop paying the premiums, the policy will lapse and your coverage ends. Your beneficiaries will receive no death benefit when you die. The premiums for whole life are higher in the early years of the policy when the insurance company isn’t as likely to have to pay a death benefit. As a result, the insurer has some money left over to invest. If your policy eventually accrues enough cash value, you can use that overpayment to pay toward your premiums. Again, this may reduce any additional death benefit your beneficiaries will receive.

Taxes

Your beneficiaries will not have to pay income taxes on the death benefit the insurance company pays when you die. Another advantage of whole life is that any returns the policy earns are not taxable until that money is withdrawn from the account. This is a tax-deferred option that high wage earners often find attractive. Small business owners who want to leave their families some money when they die may consider this type of insurance as well. Accrued cash value can increase the death benefit, but you don’t have to pay income tax on the interest or other earnings.

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