As a firefighter, you’re no stranger to risk. But when it comes to securing your family’s financial future, you don’t want to leave anything to chance. Term life insurance may seem like a safe bet, but it’s not the only option out there. Enter cash value life insurance, a type of coverage that offers both protection and investment potential. But with so many options available, how do you choose the right one for your unique financial needs? In this article, we’ll break down the different kinds of cash-value life insurance and help you make an informed decision.
Why Choose Cash-Value Insurance
However, before we go into the specifics, let’s discuss why you should consider a form of cash-value life insurance. Firstly, your salary or retirement may not be enough to cover your retirement or any financial emergencies that come up, especially in particularly vulnerable ages, such as the insurance gap created by an early retirement and the age when you can receive Medicare.
Secondly, the cash value element of the insurance policy grows tax-deferred, and any loans you take out against the policy are also tax-free as long as the policy stays in force. Often, investors are hit with sizeable tax bills or even penalties when they remove funds from a traditional investment account. That won’t happen with a cash-value life insurance plan.
Thirdly, they’re much safer than depending on the markets. The stock market may provide greater overall growth potential, but a downswing at the wrong time could put you in an untenable financial situation. Cash-value insurance helps mitigate this risk because, depending on the kind of insurance, you either have a guaranteed rate or limit your exposure to the markets.
With that being said, similar to asset classes, cash-value insurance policies provide a range of risk versus growth possibilities. The more guarantee you desire, the slower the growth will be, but the opposite is also potentially true. Which one suits your risk appetite and financial needs the most?
Whole Life Insurance
As a firefighter, you know nothing is guaranteed in this life besides death, taxes, and the cash value of whole life insurance. Okay, maybe Benjamin Franklin didn’t utter those last words, but that doesn’t make it any less true. Whole life insurance is an excellent way to build cash value with a guaranteed growth rate and a guaranteed death benefit with a fixed premium.
As you pay your premiums into the policy, a portion is placed in an investment account controlled by the insurance company, and the rest pays the insurer’s operating costs. The investments are typically conservative and safe, helping the insurance company ensure their end of the deal, i.e., fixed rates of growth predetermined by the formula laid out in the policy. The policyholder doesn’t have any control over the investment process.
At first, the cash value will grow slowly as a greater portion of your premiums goes into operating costs and toward the cost of your insurance, meaning the death benefit. Later on, more of your premium will go into the cash value portion, and eventually, you’ll see more significant growth as the interest begins to compound.
Unlike other policies, you may have the option to ‘participate’ in your policy, meaning you’ll potentially receive dividends that you can then reinvest into your policy. These dividends aren’t guaranteed, but if you do receive them, they could be a boon to your policy’s growth.
Like all types of insurance, the guaranteed benefits of whole life insurance are subject to your ability to pay your premium. However, they give you much greater control over your financial planning process. You’ll know exactly what to expect and when to expect it.
Universal Life Insurance
For those who like to keep their options open and have more control over their financial planning, universal life insurance might be the ticket. While whole life insurance offers stability and predictability, universal life insurance offers flexibility in premiums and death benefits.
As you invest in a universal life policy, a portion of your premiums goes towards the cost of insuring you and administrative fees, just like with whole life insurance. However, there is one significant difference: you can adjust the size of your premium based on your current financial situation. So if one year you have unexpectedly higher expenses, you can decrease your premium, and in the following year, you receive a windfall, you can significantly increase your premium. You just have to be sure to make the minimum payment, and anything excess of that will be applied to the cash-value element of the policy up to a limit.
The investment portion of universal life insurance operates on a different model than whole life insurance. Instead of a guaranteed growth rate, your policy’s cash value is tied to broad market interest rates, with the insurer offering a minimum guaranteed rate. When interest rates perform well, the potential for growth in your cash value increases; when they perform poorly, your cash value won’t grow as fast.
Just as you can adjust your premium, you can also adjust your death benefit – within policy limits – to align with any significant life changes, such as purchasing a new home or decreasing your liabilities over time.
However, the ability to adjust premiums and benefits comes with increased responsibility. You need to keep an eye on the policy’s performance, as insufficient premium payments combined with poor interest performance could require additional funding to keep the policy active.
Indexed Universal Life Insurance
Indexed Universal Life Insurance (IUL) is a type of universal life insurance that introduces a component tied to the performance of a market index, such as the S&P 500. Unlike universal policies that provide a guaranteed growth rate, the cash value in an IUL policy increases based on the gains of the specified index. Crediting rates, which determine how much of the index’s gain is applied to the cash value, are pivotal in this process, offering a balance between growth potential and risk management.
Thanks to a built-in floor, the policy does not suffer losses when the market dips, ensuring that the cash value won’t decrease if the index falls. This provides greater stability and more room for growth than a standard universal policy offers. However, this floor comes at a price, as gains are also capped at a certain level. This cap limits the maximum growth of the cash value within a given year, no matter how well the associated index performs.
Variable Life Insurance
A variable life insurance policy (VLI) is also a form of universal life insurance similar to an IUL. However, unlike an IUL, which is indirectly exposed to market risks and returns, VLIs are directly linked. Within a VLI, you are able to direct part of your premiums into various investment accounts, from within which you can purchase stocks, bonds, and money market funds, potentially leading to significant growth that could outpace other cash-value insurance policies. However, the flexibility and potential benefits of variable life insurance come with inherent risks. The policy’s cash value and even the death benefit can fluctuate depending on the performance of the invested assets.
So, this would be the riskiest option available to you, but it offers the greatest growth potential. If you’re a younger firefighter, you’ll likely have more years for your investments to recover if things go south. Conversely, if you’re already within five to ten years of retirement, you may not want to risk a market downswing that could still be in effect when you retire.
Final Thoughts
Whether you’re looking for the steady assurance of Whole Life, the flexible adaptability of Universal Life, the market-linked growth of Indexed Universal Life, or the dynamic investment potential of Variable Life Insurance, there’s a policy type to match every firefighter’s financial strategy and risk tolerance. Each comes with its own advantages and drawbacks, yet each is highly customizable to suit your needs.
However, insurance policies can be complex, laden with legal terminology and confusing costs, and may not always be the most apt solution for you at the moment. That’s why we’re here—to ensure you don’t overpay or end up with a policy that doesn’t fit your financial needs or risk tolerance.
If you’d like to review the options that make the most sense for you and your family, click the button below!
