Policy features unique to cash value life insurance

Cash-value life insurance policies carry special features that all relate to the cash values built up in the policies. The Policy Illustration Prior to death, you may cash in the policy for the accumulated cash value, which cancels your insurance coverage, or you may borrow all or part of the cash value. You must repay the amount borrowed with interest, and any amount owed will be subtracted from the face amount of the policy if you die whilethe debt remains outstanding.
 

Cash-value life insurance policies generally provide a policy illustration that charts the projected growth in the cash value for given rates of return. Two rates are usually quoted: the guaranteed minimum rate of return (the minimum rate that, by contract, the company is legally obligated to pay) and the current rate (the rate of return recently paid by the company to policyholders). Agents typically emphasize the current rate, perhaps by presenting a table that illustrates the rate of cash-value accumulation resulting from the two rates. Table 12.1 provides an example of such a table. Note the differences in the two cash-value columns in Table 12.1—you can readily understand why the agent would emphasize the current rate. Policy illustrations can easily be made to look  much more optimistic than it is reasonable to expect. Only after the policy is in force for perhaps 10 to 20 years can an accurate picture be drawn. For this reason, it is smart to periodically ask your agent for an in-force illustration that shows the cash-value  status of the policy and projections for the future given the current rate of return at the time of the illustration (rather than the rate used at the inception of the policy). Policy illustrations can be helpful in many cases, but they can also be written in such a way as to make the policy look better than it really is. Asking a few pertinent questions can help cut through some of the misconceptions:

1.  Is the “current rate” illustrated actually the rate paid recently? What was the current rate in each of the past five years?
2. What assumptions have been made regarding company expenses, dividend rates, and policy lapse rates?
3. Does all of my cash value earn a return at the current rate? (If not, the currentrate is misleading.)
4.  Is the illustration based on the “cash surrender value” or the “cash value”? (The cash surrender value is usually the lower value and reflects what will actually be paid if the policy is cashed in.)

Nonforfeiture Values
Nonforfeiture values are amounts stipulated in a life insurance policy that protect the cash value, if any, in the event that the policyholder chooses not to pay or fails to pay the required premiums. The policy owner can receive the accumulated cash-value funds in one of three ways. First, he or she may simply surrender the policy and receive the cash surrender value, which represents the cash value  minus any surrender charges. In reality, the true measure of the cash value of a policy isits cash surrender value (the amount received when the policy is canceled). Second, the policy owner may continue the policy with the original face amount but for a timeperiod shorter than the original policy. Third, the policy may be continued on a paid-up basis, with a new and lower face amount being established based on the amount that can be purchased with the accumulated funds. Table 12.3 illustrates the nonforfeiture values for a paid-at-65 cash-value policy. Note that a cash-value policy has very little cash surrender value unless you have held it for ten years or more

Policy Loans
The owner of a cash-value policy may borrow all or a portion of the accumulated cash value. Interest rates charged for the loan will range from 2 to 8 percent, depending on the terms of the policy. In addition, the interest rate earned on the remaining cash value typically reverts to the guaranteed minimum rate while the loan remains outstanding. As a result, the cash value ultimately accumulated may be significantly reduced. An automatic premium loan provision allows any premium not paid by the end of the grace period to be paid automatically with a policy loan if sufficient cash value or dividends have accumulated. In the first few years of a policy, this provision may not offer much benefit because cash value and dividends accumulate slowly. Eventually these funds may grow enough to pay premiums for a considerable length of time, thereby effectively preventing the lapse of the policy. Many life insurance companies make a policy’s death benefit available to a terminally ill insured through a living benefit clause that allows the payment of all or a portion of the death benefit prior to death if the insured contracts a terminal illness. This allows the policy to offer, in effect, long-term health care protection. These early payments are not cash-value loans, so it is possible to obtain more than the cash value accumulated in the policy. In addition, viatical companies specialize in buying life insurance policies from insureds for $0.50 to $0.80 per $1 of death benefit in return for being named beneficiary on the policy.
 

Waiver of Premium
A waiver of premium sets certain conditions under which an insurance policy would be kept in full force by the company without the payment of premiums. It usually applies when a policyholder becomes totally and permanently disabled, but it may also apply under other conditions, depending on the policy provisions. In effect, the waiver-of-premium option (for an extra cost) protects against the risk of becoming disabled and being unable to pay premiums. This option can be expensive and may account for as much as 10 percent of the policy premium. If you are adequately covered by disability income insurance  then you.  might want to avoid this option.

Guaranteed Insurability 

The guaranteed insurability (or guaranteed purchase) option permits the cash-value policyholder to buy additional stated amounts of cash-value life insurance at stated times in the future without evidence of insurability. This option differs from the guaranteed renewability option for term insurance in that it enables the owner to increase the face amount of the policy or to buy   an additional policy. The policy might allow the exercise of these options when the insured turns 30, 35, or 40, or when he or she marries or has children. The added costof this option is nominal and worthwhile.

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