The enhancement option in whole life insurance refers to a dividend option that increases the coverage and cash value of a whole life policy over time. This is added onto whole life insurance in the form of one-year term policies and paid-up additions.
Keep reading to learn what specific type of whole life insurance offers the enhancement option, as well as the parts of this option, its stages, and specific details to consider.
There are many types of whole life insurance to purchase, but the only type that offers the enhancement option is a participating policy.
This is because the enhancement option is funded by the dividends paid out in a participating policy. Policies that do not participate have no way to fund the purchase of additional one-year terms and paid-up additions.
Enhancement options have many specific parts that are unique to the option. When you are looking at a potential policy you will see:
While the base amount is not unique to the enhanced option, understanding how it differs from the other parts keys you in on the actual value of the policy. Learning every part allows you to map out the timeline of your whole life insurance plan.
The base amount is the complete value of the participating life insurance policy purchased. This number does not change, and it forms the basis that the guaranteed premiums pay into.
The base amount needs to be paid up in a specified amount of time. Depending on the company, this time can be set at 10, 20, or even 100 years.
The enhanced insurance amount is part of the whole life policy that combines one-year term insurance and any additional policies purchased.
When you start out with an enhanced insurance option the amount is guaranteed to be at least 100 percent of a one-year term insurance policy. If the dividends are not sufficient to purchase a one-year term policy, then the rest of the policy will be offered at no additional cost.
The enhancement option starts by purchasing one-year term-life policies to increase the coverage amount. This type of term policy operates as a renewable policy, and the purchase amount changes depending on the year.
Your enhancement option will continue to renew one-year term policies until the plan reaches the enhancement crossover point.
The paid-up additions in the enhancement option of a whole life insurance policy are purchased using dividends instead of premiums. Policies need to be able to handle the cost of a one-year term-life policy before they can move to purchasing additions.
These act as a policy rider, and the additions can increase the other benefits of a policy. They earn dividends on their own, compounding annual earnings. You can also surrender paid-up additions for their cash value, or you can take out a loan against them.
The enhancement option in whole life insurance starts out in a precursory stage where you are earning dividends from the premiums you pay into the policy. These dividends automatically apply to the purchase of one-year term-life policies that increase coverage for the year.
Eventually the policy reaches a point where the dividends earned exceed the amount required to purchase a one-year term-life policy, and the extra amount is used to purchase paid-up additions.
The enhancement crossover point is achieved when the enhanced amount is made up entirely of paid-up additions. This is when the dividend option automatically changes to paid-up additions, but there is no way to guarantee when this switch occurs.
Enhancement options are attractive because they increase the pool of cash that you can dip into over time, but there are a few details that need to be considered before you decide on taking advantage of this option.
Most insurance companies will not allow you to switch to the enhancement option after you enroll in your policy. This means that you need to decide on this before you purchase your policy.
While you cannot add the enhancement option after you enroll in the policy, you can decide to drop the enhancement option afterwards. This needs to be done in a specific time period, usually in the month before a policy anniversary.
The enhancement option relies heavily on the cash value of your whole life insurance policy. This is where you earn dividends, and if you do not earn enough dividends to pay for the one-year term policies then the insurance company covers the difference.
To limit the amount that they pay out of pocket, insurance companies restrict your ability to tap into the cash value. Once you reach the crossover point they are no longer liable for covering the difference, so you can use the cash value as needed.
Because the enhancement option is related to market conditions and the performance of the company, there is no way to guarantee the amount that you earn. An insurance company cannot tell you when you will reach the crossover point, and you will not know when you can tap into the cash value.
This makes this policy a higher risk for anyone counting on those funds for future use.
Deciding on an insurance policy is hard enough, but the additional variables relating to an enhancement option for whole life insurance make it especially treacherous to navigate.
Make sure you are getting in contact with a trained life insurance agent to discover which options are best for you. With Sim Gakhar you know that you can rest assured that you have the most qualified agent finding solutions for your situation.
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