As a first-time policy buyer, it is important to understand the different types of life insurance, their features and benefits. Due to the multitude of options, the process of buying seems daunting. However, life insurance is important for everyone, and with the right guidance, you can easily make informed choices.
There are two main types of life insurance: term and permanent. Each has sub-types categorized based on offers, values and features. But if you’re looking for permanent or whole life insurance, you might have heard of cash value.
Well, it sounds sweet to the ears, but you need to know more about cash-value life insurance before buying it.
What is a Cash Value Life Insurance?
Cash value life insurance is a policy with an added saving component. It pays a death benefit to your beneficiaries after you pass away, but also consists of a savings account you can use during your lifetime.
Your monthly payments fund the policy, but a portion goes to your savings account. Over time, the amount is accumulated, known as cash value, which earns tax-deferred interest at a fixed or variable rate, depending on your chosen policy. You can use the cash value in different ways after a set limit.
While it seems a no-brainer, cash value isn’t right for everyone. Further in the article, we will explore more about cash value life insurance and who should buy it.
Types of Life Insurances That Build Cash Value
There are different cash-value life insurance types, but all fall under permanent policies. Here, we will discuss its three major categories, which are as follows:
It is the most common and simplest permanent life insurance policy offering guaranteed and fixed face value.
Universal life insurance is comparatively more flexible and allows you to customize death benefits, premiums and cash value to a certain extent.
It is the riskiest permanent life insurance policy where the cash value isn’t fixed. The policyholder invests in bonds or mutual funds to earn the rate on cash value.
How Does The Cash Value Grow Over Time
The rate of cash value growth is subject to the type of policy you buy. For instance;
A whole life insurance policy offers a fixed return rate on the cash value. As a policyholder, you may earn additional dividends with the mutual companies.
Since indexed universal policies are flexible, the cash value rate isn’t fixed but is based on the value growth of the select indexes available within the insurance company. If the indexes fall in the stock market, so does the cash value. However you’re guaranteed a minimum return rate, but the cash value depends on how well your investment performs.
The variable life insurance is highly customizable as you can select the indexes. Your cash value is invested into the subaccount of mutual funds, stocks and bonds. While the potential of return rates is higher but so do the risks. You can lose all your money if the investments fail.
5 Ways To Use Cash Value of Your Life Insurance
Cash value is the biggest selling point of permanent life insurance that are typically expensive. You can use that amount accumulated over time. Once your cash value has reached a certain limit, you can use it:
To Make Withdrawals
You can withdraw funds from your cash value account to pay for any of your expenditures. This is also known as a partial surrender, as it reduces the death benefit your beneficiaries will receive after your demise.
To Get Loans
You can borrow tax-free loans from your savings accounts without reducing your death benefit. However, you must repay the full amount, including the tax, if you don’t want the insurer to subtract the amount from your death benefit.
To Pay Premiums
After a certain period, you can use your cash value to pay your monthly premiums and reduce out-of-pocket costs. While it reaps short-term benefits, it can negatively impact your death benefits in the long run.
To Surrender the Policy
You can use your cash value if you no longer need your policy and would like to liquidate it. You can cancel the policy against a cash value payout, subject to income tax and surrender fee.
To Increase Death Benefits
Your universal and variable policy allows you to use the cash value to increase the death benefits. But this increases your monthly premiums. However, whole life insurance has fixed death benefits and thus can not absorb cash value.
You can access your cash value and benefit from it within your lifetime. But you must understand that it takes years to build up cash value before you can use it. Besides, none of them provide all these benefits.
Therefore, you need to weigh out which one offers what and what are the certain limitations of accessing cash value. You should also consider the tax implication of each use and its impact on your death benefits.
Pros and Cons of Cash Value Life Insurance
One of the most lucrative benefits of permanent life insurance is its cash value which is a financial blanket in times of need. However, there is more to this investment and savings account of yours. Here, we discuss the advantages and disadvantages of cash-value life insurance to help you make an informed decision.
|You can withdraw money or take a loan against the cash value.||They are expensive and have higher premiums.|
|Cash value life insurance lasts for your lifetime.||Accessing and unpaid cash value can reduce death benefits.|
|The net interest rate of cash-value loans is comparatively less than any other loan form.||Ideal only for high-income individuals|
Should You Buy Cash Value Life Insurance?
As discussed earlier, cash-value life insurance is expensive and has higher monthly payouts, but the cost isn’t the only factor you need to consider. Analyze its features, benefits, positives and drawbacks before reaching a decision. You should also compare them with alternatives like term policies to choose a life insurance plan that meets your needs.
Is Cash Value Life Insurance The Right Choice For You?
Your decision to buy a cash value life insurance depends upon the benefits you want to receive, the risks you’re ready to take and the limit you have to pay premiums.
If your spouse or child will have a hard time paying the bills or you have a dependant who will rely on your financial support for a lifetime, then permanent life insurance is your best bet. For all other instances, you need to analyze your circumstances and compare different policies to find one that best suits your needs.
A cash-value life insurance policy is ideal for those who have long-term financial obligations. Since they last a lifetime and have a cash value that grows over time, you can rest assured that your and your family’s financial needs will be handled during your lifetime and even when you’re gone.
When shopping for cash-value life insurance, it is best to understand its features and why it is important. Analyze your needs and weigh them along with different aspects of the selected policy to ensure you’re going in the right direction. Like any other life insurance, permanent policies have their own set of positive points and downsides.
You must decide its impact on your finances and the coverage it gives your beneficiaries after your demise. If you’re still unsure, talk to an insurance agent and seek professional guidance to protect your loved ones when you’re not around while you get the most out of your investment when needed.
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