Understanding the Basics
In life insurance, there are two basic types of policies. The first type of policy is known as a term life policy. Term life policies are taken out for a specified number of years and will pay out a death benefit if the covered individual passed away during the term of coverage. Term policies can be purchased for up to 30 years in most cases. Term life insurance is the cheapest way to purchase life insurance regardless of the applicant’s age and heath situation.
The second type of life insurance is known as whole life. Whole life policies are sometimes known as universal life policies, though it varies from provider to provider. Whole life policies cover the policy holder from the date the policy is taken out until his death or age 100 years, whichever comes first. Whole life policies are generally more expensive than term policies.
Built-in Savings Plan
One of the advantages to whole life or universal life policies is the built-in savings account. When a customer purchases a whole life policy, part of their monthly premium goes into a savings account, while the remainder of the premium goes toward the purchase of the actual policy. Compared with traditional savings accounts, those integrated into whole life policies have a low interest rate, but they are still popular with many consumers. Policy holders can cash in part or all of their life insurance policy for cash value anytime as long as the policy is still in effect.
Cashing in the Policy
In order to cash in a whole life insurance policy, the holder must contact her life insurance agent to begin the process. It is the duty of the insurance agent to explain the risks associated with cashing out the policy and ensure that the policy holder understands she will not be getting the full value of the policy when she cashes it out.
Assume that a policy holder has a whole life policy with a death benefit of $100,000. If the policy holder never cashes out the policy during her lifetime, upon her death, the beneficiary will receive the full $100,000. A policy holder who decides to cash out her entire policy or part of her policy won’t be getting the full $100,000 regardless of how many years she has been paying on the policy. The only money the policy holder has access to is the part of her premium that was put toward the savings plan. If the policy holder cashes out the full cash value of the policy, the coverage is canceled, and the amount of the premium that went toward the policy will not be returned to the covered individual.