A cash value life insurance is a form of a lifelong policy that entails an investment element.
Cash value refers to the fraction of your policy earning interest, which you can take a loan against, and is available for withdrawal.
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The said amount is tax-free and earns interest and other investment benefits.
A cash value policy is available for permanent life insurers.
The premiums paid can be for the following purposes:
- Cash value.
- Coverage/ insured cost.
- Policy fees or charges.
Options for a Cash Value life insurance
Whole life insurance offers a fixed monthly premium and an assured payout.
Premium payments remain constant throughout the policy.
Cash value grows at a small assured rate.
Adding the insurer’s company dividends into your cash value annually builds up your cash value account faster.
Universal life insurance policy is more flexible compared to whole life insurance.
Some types of life universal insurance contain the option to adjust your death benefit to lower your premium payments.
This is only possible if there is an adequate accumulation of the cash value account to cover the policy’s costs.
Guaranteed issue life insurance is a type of whole life insurance that offers minimal coverage amounts.
Guaranteed issue policies, offer cash value as a part of the insurance benefits.
The cash value amount is minimal since the coverage provided is also minimal.
In this policy, if you pass on within two or three years after buying the policy, your beneficiaries will not receive the death benefits.
Why opt for a Cash value insurance
Cash value build up:
It is favorable to high-income earners, for those who want to build their cash value either for their benefits or for the benefits of their beneficiaries.
You can pay high premiums so that even if there are deductions of the policy charges, a substantial amount remains for the cash value account.
Additional retirement savings:
If you are searching for retirement savings benefits, the cash insurance policy is best.
It will enable you to grow your cash value so you can access it after retirement.
How to get your cash value
Surrender the policy:
To terminate a policy, you can surrender, if you are no longer interested in the plan or unable to pay the regular premiums.
Surrendering a policy allows you to get your cash value back.
The insurer deducts any surrender charge, unpaid premiums, or loans.
The small amount is better than leaving the policy empty-handed due to the default of premiums payments.
Take a loan against the cash value:
Insurance companies permit you to take a loan with your cash value as the collateral.
The loan, just like any other, grows interest.
The interest rates can be variable or fixed depending on the market prices.
If you happen to pass on before clearing the loan, the insurers take away the remaining balance from the payout meant for the beneficiaries.
The good thing is that policy loans don’t feature in your credit records.
Withdrawal:
You can opt to withdraw your cash value from the policy.
If you withdraw the interests or investment gains, it is liable for taxation.
Withdrawing from a life insurance policy reduces the amount of payment given to your beneficiaries.
Benefits of cash value insurance
Guaranteed Payouts:
The cash value policy pays out a significant sum cash benefit, upon the death of the insured, to the beneficiaries.
The higher the cash value, the higher the death benefits.
Flexibility:
Depending on the type of permanent life insurance, you can alter your premium payment hence adjusting the death benefits.
This, as mentioned, is an option in Universal Life insurance.
In life insurance, the annual dividends may be adequate to cater for the payment of your premiums.
Furthermore, the dividends earned from the cash value can also buy more life insurance coverage.
The dividends can alternatively top up your cash value account.
Personal gains:
Life insurance benefits not only your beneficiaries but also you as the insured while still alive.
Life insurance offer riders included in the policy, such as chronic illness rider.
This provision guarantees your death benefits earlier in the event of a chronic illness diagnosis to cater to your medical expenses.
Moreover, when a life situation causes permanent disability, there is a provision for a premium rider waiver in the life insurance policy.
This frees you from the burden of premium insurance payments while unable to work for a source of income.
After the accumulation of the cash value, you can use the sum to pay up your premiums.
This can be an option for those having difficulties paying off their premiums to ensure that the policy does not lapse.
However, if you exhaust all the cash value amount, the policy is bound to lapse.
Tax benefits:
The cash value grows with no tax implications.
Furthermore, loans borrowed against the cash value are also not taxable.
The death benefits given to the beneficiaries are tax-exempted as well.
Drawbacks of Cash Value Life Insurance
Meet the qualifications:
In the case of riders, you have to qualify for the provisions by undergoing a medical exam to approve the release of funds.
The approval process takes too long, and when you fail, it is either postponed or declined.
However, in the modern market, automated accelerated underwriting is an alternative to the medical exam, and it takes up to 24hrs.
Expensive:
Cash value life insurance requires cash from your account taken to the insurance policy in the form of premiums, referred to as opportunity costs.
The premiums paid are in large amounts for a long period compared to a term life policy, as it provides lifelong coverage making the policy costly.
Complicated policy:
Life insurance is complicating and confusing for the clients.
It requires in-depth research or advice from the insurance company.
With various life insurance plans, it is easy for a client to confuse the different policies and even have a hard time choosing a favorable policy.
Risk of money loss:
For a cash value insurance policy, it is easy to lose your cash value and the death benefits if you fail to pay the premiums.
Failure to pay the premiums is not always by choice, rather by life circumstances.
If you are unable to pay your premiums at the same time you don’t want to surrender the policy, you stand the risk of losing your cash value and death benefits.