Cash value life insurance June 2019 |

Cash value life insurance

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Use the accumulated cash value in your policy to cover premiums or boost your death benefit.

Permanent life insurance allows you to accumulate cash value over the life of the policy. While these cash value policies are traditionally more expensive than term life insurance, they provide flexible savings options that can be used in a variety of ways before you pass on.

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What is cash value life insurance?

Cash value life insurance is a form of permanent life insurance that accumulates cash value over the life of the policy. Term life insurance doesn’t build cash value, but permanent, universal and whole life policies do.

Cash value acts as a form of savings for the insured, but can often only be utilized while the policyholder is still alive. A portion of premiums are paid into the cash value of the policy and can be used for a number of purposes, including to boost the death benefit, cover premiums or save a retirement nest egg.

How do cash value policies work?

Each time you pay your insurance premium, your payment is split between your death benefit and your policy’s cash value. The money you pay toward the cash value goes into an investment account. Over time, those dollars will grow tax-deferred.

Types of cash value policies

There are three types of life insurance policies that build cash value:

Is the cash value in a whole life policy worth it?
Why take out a cash value policy? One reason is because your cash value will grow with compound interest.

Here’s the thing: It takes a long time for your cash value to grow. It probably won’t be substantial until at least 12 to 15 years. So, it might make sense to take out a cash value policy while you’re young. This way, you’re more likely to have an investment account you can rely on when you’re older.

Another dimension to consider is your other investments. If you have a long way to go before maxing out your retirement accounts — like a 401(k) or IRA — a cash value policy may not be the best investment for you right now. Consider focusing on your current investments before choosing whole life insurance.

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What can I use the cash value of my policy for?

The cash value of your insurance policy is a flexible form of savings, which means there are a number of actionable options.

Take out a loan.

If you’ve built up enough cash value in your policy, you can take out a loan. The perks of borrowing against your policy’s accumulated cash value? There’s typically no credit check, no underwriting requirements and insurers often offer cash value loans at more competitive rates than traditional providers.

But borrowing against your policy’s cash value is a risky endeavor, as it could reduce your death benefit when you die. While you’re not obligated to pay back the loan, if you fail to pay back what you borrow, the amount of the loan plus interest will be deducted from the total death benefit of the policy after you pass.

Make a big purchase.

If you need cash for a big purchase, you can withdraw some or all of the accumulated cash value in your policy to cover a large expense.

Similar to taking out a loan against your policy, this option may also reduce the size of your death benefit. Your provider may reduce your death benefit on a dollar by dollar basis, or you may lose your death benefit altogether.

Talk to your provider about its policies is on borrowing against accumulated cash value before you make a decision.

Save a retirement nest egg.

Your life insurance’s cash value could help supplement your retirement income. The longer you let your cash value grow, the greater your investment later in life. But you may need to surrender your policy to access your policy’s cash value.

When you surrender your policy, you forfeit your death benefit entirely and are no longer insured. Your insurer may also charge you a surrender fee. Since surrendered cash value is also subject to income tax, this will further reduce the amount you receive when surrendering your policy.

Cover premiums.

Once you’ve built up enough cash value in your policy, you may be able to use it to cover the cost of your premiums. This option is best exercised by those who have built a sizable cash value in their policy.

Using the cash value of your policy to cover premiums reduces the total cash value in the policy. Should your policy’s cash value drop too low, you could stand to lose your death benefit entirely, defeating the purpose of the policy altogether.

Increase the death benefit.

If you don’t have any plans for the cash value in your policy, you can opt to empty the accumulated cash value into a boosted death benefit, providing more money to your beneficiaries after you pass.

Whole life policies from mutual insurers may allow you to purchase paid-up additions to your policy. Using the dividends from your policy, you can add a rider to your existing policy that increases the amount of your death benefit.

Policies and protocols differ by provider, so ask your insurer how you can convert the cash value accumulated in your policy into a larger death benefit for your beneficiaries.

Risks involved with cash value life insurance

Cash value life insurance isn’t without its drawbacks, and term life insurance can be a simpler and more affordable alternative. Here are a few red flags to be mindful of when considering cash value life insurance:

  • Expensive premiums. Cash value life insurance premiums tend to be more expensive than the cheaper premiums associated with term life insurance.
  • Complicated policies. Compared to the straightforward commitment of term life insurance, cash value insurance has a confusing array of options to sort through, from annual dividends to policy loans.
  • Surrendered cash value. If the cash value of a policy hasn’t been used or converted into a larger death benefit, there’s a good chance it will simply be surrendered to the insurance provider at the time of death.

Bottom line

Cash value life insurance helps you build your savings over the life of your policy. With accumulated cash value, you can borrow against your policy, build your retirement nest egg or take a larger death benefit. But the buildable savings of cash value life insurance isn’t without its drawbacks, namely: expensive policy premiums.

If you don’t plan to utilize the perks of a cash value policy while you’re alive, you may want to consider your life insurance options with other providers to get a policy that fits the needs of you and your family.

Frequently asked questions

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