Cash value in life Insurance policy

What Is Cash Value Life Insurance?

Cash Value Life Insurance is a form of Permanent Life Insurance. In addition to providing death benefits, the cash value life insurance also provides a tax-free saving component. It is done by building a cash value against a specific portion of the premiums being paid. This feature makes this an attractive policy because the saving component provides a living benefit to the insurer. The money can be accessed anytime in life for withdrawal or loan. The cash value grows over time as per the interest rate, depending on the type of policy purchased.

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How Cash Value Life Insurance Works

The cash value life insurance works like any traditional life insurance. The premium rate is decided as per the insurer’s age, gender, and coverage amount, and it remains constant throughout the duration. The premium payment can be paid monthly or annually. Cash-value life insurance provides a death benefit and builds up cash value.

After the death of the insurer, the death benefit is paid out to the declared beneficiaries, who can use the money to cover the deceased’s final expenses or pay off his debts, if any. The cash value component of the policy works as a living benefit to the insurer. The money can be accessed during the time of need by the insurer.

Is life insurance with a cash value worth it?

Doing the cost-benefit analysis of the cash value life insurance, one can conclude that it is not worth it. Cash-value life insurance comes with death benefit and cash value. The latter feature can attract buyers, but the lifetime payment of high-rated premiums makes it a not-so-viable option. Many people would prefer term life insurance with coverage of customized term length for a guaranteed death benefit. The cash value of the cash value life insurance is tax-free. However, the limited options for investing the money hesitate the buyers.

Can I withdraw cash value from life insurance?

The cash value component of permanent life insurance works as a tax-free saving account. The amount can be withdrawn at any time, either partially or fully. The withdrawal amount needs to be repaid otherwise; the death benefit is reduced. In case of surrender, the amount can be withdrawn altogether. Other than withdrawing, the insurer can also take out loans against the cash value. The loan needs to be repaid with an interest rate to maintain the death benefit.

The premium rate for cash value life insurance can be expensive as the policy provides a death benefit and saves cash value. Suppose if the insurer fails to pay the premium, he can use the cash value for paying the premiums. However, the insurer will need to refill the cash value used. Some insurance companies also provide the option of adding the cash value to their death benefit in case they do not have a use for it.

Advantages and Disadvantages of Cash Value Life Insurance

Advantages: Cash-value life insurance provides lifelong coverage. It not only secures the insurer’s final expenses but also promises a living benefit, and the insurer gets to enjoy a tax-free saving account. The insurer can withdraw the cash or take a loan against it during a desperate time of need. The cash value can also pay for the premiums if the insurer fails to do so. This feature can prevent insurers from surrendering their policy when they can not pay the premiums.

Disadvantages: Cash-value life insurance is expensive and can cost up to 5-15 times more as compared to other insurance policies. The lifetime duration means that the insurer has to pay high-rated premiums for a lifetime to keep the policy active. Many insurers fail to keep up with the payments, and this leads to high chances of surrender. Although premiums can be paid using the cash value, the amount needs to be refilled to maintain the death benefit. Moreover, Cash value has limited investment options that make money selectively convenient only.  

What you can do with the cash

A specific portion of the premiums goes towards building the cash value, which is accessible during the insurer’s life. In critical times, the amount can be withdrawn partially or wholly. The money can be used for doing anything the insurer needs to do but repaying the withdrawn amount is mandatory. In case the repay does not happen, the death benefit of the insurer decreases. If the insurer withdraws the amount completely, he has the option of surrendering the policy after paying a surrender fee.

Types of Cash Value Life Insurance