Cash Value in Life Insurance

Life insurance is a financial safety net that provides your loved ones with financial assistance in the event of your unexpected death. However, there’s more to life insurance than just death benefits. Many life insurance policies provide cash value, which can be used as a savings vehicle, investment opportunity, or to pay for premiums. In this article, we’ll explore what cash value is, how it works, and how it can benefit you.

What is Cash Value?

Cash value is a feature of certain types of life insurance policies. It’s essentially a cash reserve that builds up within the policy over time. Part of your premium payments go towards the death benefit, and the other part goes into the cash value. The cash value earns interest or investment returns, which means it can grow over time.

When you buy a life insurance policy, you’ll typically choose between term life insurance and permanent life insurance. Term life insurance provides coverage for a specific term, such as 10, 20, or 30 years, and does not accumulate cash value. Permanent life insurance, on the other hand, provides coverage for your entire life and does accumulate cash value.

Types of Permanent Life Insurance

There are several types of permanent life insurance, including:

How Cash Value Works

When you pay your premium for a permanent life insurance policy, a portion of the payment goes towards the cost of insurance and the other portion goes towards the cash value. The cash value earns interest or investment returns, which are tax-deferred until you withdraw them.

You can access the cash value in several ways. You can take a loan against the cash value, which you’ll have to pay back with interest. If you don’t pay back the loan, the death benefit will be reduced by the outstanding loan balance. You can also withdraw the cash value, but this will reduce the death benefit.

The amount of cash value you have depends on several factors, including the type of policy, your age, and the length of time you’ve had the policy. Cash value typically grows slowly during the early years of the policy but accelerates as the policy matures.

FAQ

What is the benefit of cash value?

The benefit of cash value is that it can provide you with a savings vehicle or investment opportunity while also providing life insurance coverage.

Can I access my cash value without affecting the death benefit?

No, accessing the cash value will reduce the death benefit.

How is the cash value taxed?

The cash value grows tax-deferred until you withdraw it. If you withdraw more than you’ve paid in premiums, it’s considered income and subject to income tax. If you surrender the policy, any gains above the premiums paid are subject to capital gains tax.

Can I borrow against the cash value?

Yes, you can take a loan against the cash value, which you’ll have to pay back with interest. If you don’t pay back the loan, the death benefit will be reduced by the outstanding loan balance.

The Bottom Line

Cash value can be a valuable feature of permanent life insurance policies. It provides a savings vehicle or investment opportunity while also providing life insurance coverage. However, it’s important to understand the costs and benefits of cash value and how it fits in with your overall financial plan.