Maybe you’re thinking about purchasing life insurance to provide financial security for your loved ones after you’re gone. It’s not a pleasant topic to dwell on, but ensuring that your spouse or partner can pay off the mortgage and your kids can afford college gives you peace of mind.
But what if your life insurance could also provide financial benefits while you’re still alive? Imagine having access to funds that you can use to improve your home, start a business, or handle emergencies. This is where cash value life insurance comes into play.
How does cash value life insurance work?
With a cash value policy, you choose the amount of money to be paid out when you die and designate beneficiaries to receive that sum. The higher the death benefit, the more you will have to pay for the policy.
You pay an annual premium to keep the policy active. The insurance company may adjust the premium based on its business needs. If you pass away while the policy is active, your beneficiaries can file a claim to receive the death benefit.
Unlike term life insurance, which is in force for a specific term, cash value life insurance is a type of permanent insurance that remains active until your death. You can surrender or cancel the policy, or the insurance company can cancel it if you don’t pay the premium.
The cash value savings component
A portion of your premium payments is allocated to the cash value component of the policy. This cash value earns interest over time, thanks to the insurance company. The policy accumulates a “nest egg” that you can utilize for various needs, and you can increase the cash value by making extra premium payments.
How to utilize your cash value
There are three ways to access the cash value of your policy:
Make a withdrawal
You can withdraw money from the policy, just like you would from a regular bank account.
Take out a loan
You can borrow against the cash value of the policy. The insurance company will expect repayment with interest. If you pass away with a loan balance, that amount will be deducted from the death benefit.
Surrender the policy
If you cancel the policy, the insurance company will return the cash value to you after deducting any outstanding premiums, loans, and administrative fees. However, keep in mind that surrendering the policy means you will no longer have life insurance.
Some insurers may also allow you to use the cash value to pay your premium or increase your death benefit.
How long does it take to build cash value?
Cash value grows gradually over time. During the initial years of a cash value policy, most of the premium is used for insurance coverage and administrative fees, with only a small portion going toward the cash value. As time passes, the balance shifts, but it may take 10 to 15 years before there’s a substantial cash value balance worth accessing. Consulting with a financial advisor can help determine if a cash value policy aligns with your needs.
Types of cash value life insurance policies
There are several types of cash value life insurance policies to choose from:
Whole life
Whole life policies are the most common type of cash value insurance. They offer guaranteed cash value accumulation at a modest rate. Premiums and death benefits are fixed, and the premiums do not change based on market conditions or health changes.
Indexed universal life
Indexed universal life insurance policies offer cash value growth based on the performance of a chosen stock index. Earnings may be capped or subject to a minimum floor. You can adjust the death benefit and premium to suit your needs, and the insurance company may adjust the premium or charge fees based on its business requirements.
Variable universal life
Variable universal life insurance policies allow you to have more control over how your cash value is invested. You can choose from different investment options provided by the insurance company. However, these policies are considered riskier than other types of cash value insurance and typically have higher administrative fees.
Is cash value life insurance right for you?
Cash value life insurance may be suitable for individuals who have maximized their 401(k) and IRA contributions and seek to diversify their investment portfolios. It’s also worth considering if you need life insurance for the long term rather than a specific duration. However, cash value policies are more costly compared to term life insurance.
To determine the right policy for you, it’s advisable to consult with a licensed insurance agent or independent financial advisor. If you prefer to compare cash value life insurance policies on your own, you can use an online insurance broker like Personal Finances Blog to help you find the best options from multiple carriers.
Investing in a cash value policy offers more than just coverage. It provides additional financial benefits during your lifetime. However, cash value life insurance may not be suitable for everyone. It’s essential to weigh the pros and cons and explore other alternatives like term life insurance, which doesn’t include a cash value component.
Remember, understanding your life insurance options and making an informed decision is crucial. Cash value life insurance can be a valuable tool, but it’s essential to find the right fit for your unique financial situation.
This article is originally published on Personal Finances Blog.