Submitted by AnnuityCampus on Tue, 01/03/2012
If you are lucky enough to know about the living benefits associated with cash value life insurance policies, then you also know that you may take out money for any reason including tax-free retirement income. These benefits is what make purchasing and properly funding a cash value life insurance policy such as a whole life and indexed universal life insurance policy. However, when you take the money out, do you know how much it will cost you?
Problem #1- Time frame
The problem with taking money out of your life insurance policy could depend on when you take it out. For instance, if you plan to start taking out money prior to the 10th policy year, the fees or interest rate could be 6% or more. Some policies have a variable loan rate which means it could even cost you more to access your money.
Most whole life and indexed life insurance policies are “heavy” the first 10 years because most of the cost of insurance (COI) is included in the first 10 years. When life insurance brokers design cases for their clients they either do not ask their clients when they are planning to take out the money or they do not disclosure those numbers prior to the sale of the polices. Unlike indexed or variable annuities, the potential loan rates are not required to be disclosed. Also, a product with a variable loan rate will illustrate better than a policy that offers a fixed rate.
Problems #2- Cost
Most cash value or permanent life insurance policies offer a “Wash” after 10 years. This means that if the policy states that you will pay 1% in interest they will pay you 1% so that you do not have to pay interest on your money. Prior to 10 years the loan rate could adversely affect your cash value.
When people purchase a cash value life insurance policy they are told that as their policy accumulates cash value then can take out the money in the future to fund a tax-free retirement. The IRS does not consider proceeds from a life policy as income (Within IRS guidelines) and that is why “The Rich” purchase and fund these policies.
Before you buy a cash value life insurance policy, including a whole life and indexed universal life insurance product, you need to disclose to your life insurance broker when you plan on taking out money from your policy. You also want to get in writing what the fee or loan schedule is prior to buying one of these policies.
Make sure you consult with a qualified life insurance broker to make sure a cash value or permanent insurance policy is right for you and your family.
Read more: http://www.advisorworld.com/2012/01/03/cash-value-life-insurance-problems#ixzz1u8KvNSF3
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