Whole Life, Cash Value and Automatic Premium Loans
A Whole Life policy is saving your OWN money for your OWN death, but if you happen to die early, life insurance will kick in to make up the difference of what you didn’t save.
Check out this chart. The top of the chart is at 100K, that’s the death benefit/face amount.
The red is cash value, everything in the bottom triangle is cash value, this is your own money you pay in. Over time it grows, and see how it reaches the death benefit amount at age 100? I circled that in red. So, if you reach age 100, all the money that’s in there is YOUR own money.
So what’s the insurance part? The blue triangle is the insurance part. Insurance makes up most death benefit initially, but over time you have less and less need for the insurance as the cash value grows.
When you pay premium, most goes into the cash value, but some part of it is paying to have the insurance there too.
So, let’s say a person dies at 60 years. His pay out will be 100K, and some will be cash value and some will be insurance. This is what the yellow line is indicating. Since he died before he saved the 100K himself, the insurance component kicks in.
Let’s see if he dies at 80 yrs old, more of the money he gets will come from the cash value part.
Now the cash value is YOURS. You can spend it if you’d like. Maybe at 60 you want to buy an RV, so you take out your cash value to make the down payment, let’s say there is 60K in cash value, that means the insurance part is 40K, totaling together for the 100K death benefit.
At 61, a year later, you pass away and you never got to pay back the cash value loan you took out. So your payout for the death benefit will look like this, only the highlighted portion because the cash value is gone, probably a payout of 38K:
So if you have an automatic premium loan on your account, it will take the cash value to pay the premium. Imagine this: You fall into a coma, no one is paying your bills. Your insurance payment is missed, instead of canceling it takes a little loan from the cash value for the premium payment.
Let’s say that was $200. $150 of that payment will be cash value and $50 goes to the cost of insurance. Let’s say that happens for three months before you pass away. So $600 was taken as a loan.
Your death benefit will be 100K-$600 since you never had the chance to pay it back. Well $99,400 is still pretty great, but what happens when you’re in the coma for years??! Eventually the cash value will be depleted and the policy will lapse.
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