CASH VALUE LIFE INSURANCE

What Is Cash Value Life Insurance?

Cash value life insurance is a type of life insurance policy that offers both a death benefit and a savings component that builds up cash value over time. Therefore, if your life insurance policy has a cash value factor, it offers monetary benefits to both the designated beneficiaries and the policyholders.

In other words, for a policy with cash value, a portion of the premiums the policyholder pays goes towards an investment account, which earns interest or other investment returns.

The policy's cash value grows tax-deferred, meaning that taxes are not owed on the investment gains until the policyholder withdraws or surrenders the cash value. Policyholders can access the cash value through withdrawals, loans, or surrendering the policy.

Which are the policies that offer cash value?

Cash value life insurance policies include whole, universal, and variable life insurance. These policies differ in terms of how the investment component is structured and how much flexibility the policyholder has regarding premium payments and death benefit amounts. However, term life insurance does not offer cash value.

For example, whole life insurance gives a fixed rate of return, while indexed universal insurance is related to the stock or bond index. Similarly, in the universal variable index, the cash value is associated with bonds, mutual funds, or sub-accounts of stocks.

While cash value life insurance can offer both a death benefit and a savings component, it is generally more expensive than term life insurance, which only provides a death benefit. Additionally, the investment returns on the cash value component may not be as high as other investment options, and fees may be associated with the policy. Therefore, it is important to carefully consider whether cash value life insurance is the right option for your financial goals and needs.

Cost of Cash Value Life Insurance

Cash value life insurance tends to be more expensive than term life insurance because a portion of the premiums the policyholder pays goes towards building up the cash value. In other words, apart from the insurance costs, the policyholder is also paying for the policy's investment component.

The cost of cash value life insurance can vary widely depending on several factors, including the policyholder's age, health, lifestyle, and the amount of coverage and type of policy. The additional charges associated, such as surrender charges or administrative fees, can also impact the policy's overall cost.

How Cash Value Life Insurance Works

A cash value life insurance policy's cash value savings component charges interest as you pay premiums. Whole life policies have a fixed interest rate, while universal life policies have a market-based rate.

Your cash value may be used in various ways, each of which is determined by the kind of life insurance policy you have.

When the cash value grows to the point where it is equal to the amount of your death benefit

• With a whole life coverage: In that case, your life insurance policy will be automatically terminated, and you will receive the death benefit if you have whole life coverage.
• With universal life insurance: The cash value in your policy has the potential to result in a zero-cost policy, which indicates that all premiums are paid from the cash value that has been accumulated.

Both types of policies have a cash value component that can be converted into a loan against the life insurance policy once it reaches a predetermined threshold.

Should I buy a cash value life insurance policy?

If you have a long-term financial plan and meet these criteria, you can consider buying a cash value life insurance policy, whether whole or universal.

• If you need life insurance coverage for your entire life.
• Your focus is also on building cash value.
• You require guaranteed death benefit.
• If you are looking to reduce your tax liability.

Pros and Cons of Cash Value Life Insurance