Despite Black Americans being more likely than other racial groups to depend on life insurance to cover their important expenses, it has been found that white families have significantly larger policies than their Black counterparts, even when their financial profiles are similar.
Because of this, it is especially important to choose the right policy for you and your family. But it’s sometimes easier said than done when there are a plethora of options available on the market, and not enough educational resources to help find the perfect fit.
1. Get clear on how life insurance works
Securing a life insurance policy means that a sum of money will be paid to one or more named beneficiaries when the insured person dies. The payout amount is contingent on how much the premiums were that the policyholder pays during their lifetime.
Using life insurance as a cash asset
Despite what many may think, it is possible to withdraw funds from a life insurance policy before anyone passes away, but there are some important things to consider first.
As Forbes points out, cashing out from a life insurance policy has the potential to reduce the death benefit.
“Withdrawals are taken first from your “basis”—the amount you’ve paid into cash value through premiums,” the outlet writes. “That money comes out tax-free because it’s considered a return of your basis.”
If you are looking for a policy with that serves as an investment vehicle, or allows you to be able to withdraw funds with low penalty, permanent life insurance policies may be the best route to consider.
This kind of policy enables you to invest in conservative investments like mutual funds or exchange-traded funds (ETFs). With these types of policies. you have the freedom to decide how you want to diversify your investments.
The two most common types of permanent life insurance that can be used as an asset are whole life insurance and universal life insurance, according to financial experts at JP Morgan.
2. Identify which type you need
There are a variety of policy types when going life insurance shopping, which can be both positive and daunting. As mentioned above, if you’re aiming to use a life insurance as a way to diversify your investment portfolio, or actually utilize it to your advantage while you’re living, there are two types of policies that may be a good fit.
Whole life insurance
The most common type of permanent life insurance, whole life insurance enable the policy to accrue cash value. This is because a part of the monthly premium payment that goes into a cash value account which increases over time at a minimum guaranteed rate based on the terms of the policy.
Universal life Insurance
Conversely, universal life policies typically enable policy holders to accrue interest that can be borrowed against over time. But you should be mindful that premiums aren’t typically fixed, meaning that they can change, your earning rate isn’t guaranteed. This type of policy owners to invest their earnings into the accounts of their choice, so you have the potential to earn more over time.
3. Getting money from your policy
Cash withdrawals
Did you know you could make withdrawals from your life insurance policy like you would your checking account? Yes, you can take money from your policy, which is a great alternative to taking out a traditional loan if you need a lump sum of money quickly. With the life insurance withdrawal, you are given access to the funds without having to them back. Instead, your life insurance beneficiaries will receive a reduced payout once you pass away. Also, taxes aren’t typically owed on the withdrawal amount either.
Surrendering your policy
Surrendering a policy means you are canceling it and cashing out. When that happens, you are able to get you get back the cash value you put in. While this is advantageous if you are need of a financial boost, please be aware of any fees or penalties your insurance company charges when canceling the policy. Speaking with a seasoned life insurance specialist or a rep from your policy’s company can save you thousands in penalty charges.
