When you own cash value life insurance, your premium payments are allocated three ways. First, a portion of each premium pays for the actual insurance costs. Like term insurance, a specific cost is associated with the policy\’s death benefit, based on your age, health, and other underwriting criteria. Second, a portion pays for the insurance company\’s operating costs and profits. The remainder goes toward the policy\’s cash value.
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.
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.
The cash value portion of your premium account decreases over time
The amount that is allocated from the premium payment to the cash value decreases over time because of the increasing cost to insure your life. It is very similar to the way your principal and interest payments on your mortgage works. More of the monthly payment goes towards the interest in the early years and it transitions over the life of the mortgage to pay down 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.
Want to find out more about Permanent Life Insurance, then visit Joshua Cumrine\’s site on how to choose the Best Colorado Financial Planner for your needs.
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