Cash value life insurance, also known as permanent life insurance, is a type of insurance policy. It provides policy holder with a death benefit paid out to the policyholder’s beneficiaries upon his death. Also, it holds an additional cash value component that accumulates over time.
Policyholders can use this cash value as a source of supplemental retirement income, an emergency fund, or even as collateral for a loan. With cash-value life insurance, you will make regular payments to the insurance company to keep the policy in force.
These premium payments are used to pay for the cost of the policy, and associated fees, to fund the cash value portion of the policy. As the policyholder continues to make payments, the cash value portion of the policy accumulates.
This cash value grows on a tax-deferred basis, meaning that the policyholder does not have to pay taxes on the growth of the policy until they withdraw it.
The cash value amount depends on the policy type, the premiums paid, and the performance of investments within the policy. Generally, cash-value life insurance policies include some type of investment option that the policyholder can choose.
Cash value insurance differs from term insurance in that it provides a death benefit and a cash value that the policyholder can access while alive. The policyholder’s premiums and any dividends paid by the insurance company create the cash value.
The policyholder can access the cash value, which accumulates tax-free, through a loan or withdrawal. Policyholder can borrow from the policy’s cash value as long as the loan does not exceed the total cash value of the policy. The policyholder must repay the loan to the insurance company with interest.
If you do not repay the loan, you will lose the death benefit. The policyholder can also withdraw money from the policy’s cash value without repaying it. However, this will reduce the death benefit and could cause the policy to lapse if the policyholder withdraws too much money.
Cash value insurance works because a portion of your premium is allocated to your policy’s cash value each month. This money accumulates in your account over time, earning interest, and can be accessed through a policy loan or withdrawal.
Depending on the type of policy, you can access these funds as soon as the policy is in force. For example, with a whole life policy, you may access cash-value funds once the policy has been in force for two years.
With a universal life policy, you can access the funds after the policy has been in force for one year. Cash value insurance can be a great way to supplement retirement income, as you can use the money in your policy to cover expenses or take out a loan against the policy.
When deciding whether to buy a cash-value life insurance policy, it is important to consider your situation. It would help if you considered how much financial protection your family will need in the event of your death and how you would use the cash value.
If you are stable financially but want to invest for the future, then cash value life insurance may be a good option. If you are looking for an emergency fund, consider whether the cash value will provide you with enough funds to cover any unexpected costs.
It is also important to consider your age and health when deciding on a cash-value life insurance policy. Generally, your premium will be lower the younger and healthier you are. Therefore, you can get a better deal on a cash-value policy if you are young and healthy.