Cash Value Life Insurance

Instructor: Elisha Madison

Elisha is a writer, editor, and aspiring novelist. She has a Master's degree in Ancient Celtic History & Mythology and another Masters in Museum Studies.

Case value life insurance pays out a death benefit like term life insurance but also accumulates cash value. In this lesson you'll learn how the insured can take out loans on the policy amount or cash it in if they decide they need the money or no longer need the policy.

Cash Value Life Insurance

Like other types of life insurance, cash value life insurance pays out a death benefit to the insured individual's beneficiary. But that isn't all it does. It also has an investment component that accumulates cash value. There are many types of cash value insurance, including:

  • Whole life insurance: A permanent life insurance policy with fixed premiums.
  • Universal life insurance A permanent life insurance policy with flexible premiums and fixed interest rates.
  • Variable life insurance: A permanent life insurance policy with flexible premiums and variable interest rates.

Cash value insurance allows the insured to pay premiums, which are then invested so that even more money is added to the death benefit that will be paid out when the insured person passes away. Thus the death benefit just keeps increasing over the years. In theory, the longer you live, the more will be paid to your beneficiary. What makes this different than a traditional investment is that the money put into the policy is non taxable, so it sits in savings earning a slight increase due to interest rates, without affecting your taxable income each year.

How Does It Differ From Term Life?

Unlike cash value life insurance, term life insurance is not a permanent form of insurance. The policy can expire and may need to be renewed one or more times during the insured person's lifetime. Terms vary by policy, but can be 10, 15, or 20 years. There are other differences between cash value and term life insurance as well. For example, cash value life insurance is usually more expensive due to the pay out methods, investment opportunities, and savings capability. Also, the money in a cash value life insurance account can be withdrawn, removed, or loaned.

How Does it Work?

One of the biggest advantages of cash value life insurance is that, over time, as the value of the policy increases, the insured can take a loan on the value of the insurance, withdraw money from the insurance, or surrender the policy all together to get a percentage of the money back. Let's explore each of these options in more detail.

  • Loans: This process is fairly simple. The insured takes a loan out on the amount of the policy. Then, over time, they have to pay it back to reimburse the death benefit. For example, let's say the insured borrows $10,000 their benefit, and then pays an additional $50 a month on top of the regular payments to reimburse themselves. This is a great option because unlike credit card debt and outside loans, this loan is not reported the same, causing fewer negative effects on your credit score. However, if the insured passes before the reimbursement has been completed, the amount that was removed will have lowered the death benefit.
  • Withdrawal: The withdrawal is similar to the loan except you are depleting money from the death benefit and not planning on replacing it. Of course, this makes the death benefit pay out permanently smaller.
  • Surrender: This can also be called cashing in, which means that the insured surrenders the policy to get back a percentage of the death benefit that has been paid in. The problem with this is two-fold: the insurance company will keep a percentage and the money received will be taxed as income.

Is It Worth It?

A cash value life insurance policy is not the best option for everyone. Cash value life insurance can be worth it if the insured

  • Is starting early in life
  • Makes a larger than average salary
  • Needs an option for saving money other than a 401K

This type of policy just keeps expanding, allowing for a larger and larger benefit to be paid out in the end, which is perfect if the insured is planning on paying college expenses or paying off a large debt like a mortgage.

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