Cash Value Insurance: What You Need to Know

Cash value insurance, also known as cash accumulation insurance, is a type of life insurance policy that provides protection for your family while also allowing you to build savings over time. This article will give you an overview of what cash value insurance is, how it works, and if it may be a good option for you and your loved ones.

What is Cash Value Insurance?

Cash value insurance is a type of permanent life insurance that has the dual purpose of providing a death benefit to your beneficiaries in the event of your passing and building cash value over time. These policies offer lifelong coverage, unlike term life insurance which only provides coverage over a specified period.

The premiums you pay for cash value insurance are typically higher than that for term life insurance due to the extra features like the cash accumulation component.

How Does Cash Value Insurance Work?

With cash value insurance, a portion of your premium is used to pay for the death benefit and a portion is invested in a cash value account that grows over time. The cash value account is typically invested in a mix of stocks, bonds, and cash equivalents.

As the cash value account grows, you can borrow against it or withdraw the money. Any loans you take out will reduce the death benefit if they are not paid back before your passing. Surrendering the policy for cash will also reduce or eliminate the death benefit.

Keep in mind that withdrawals and loans from the cash value account may also have tax consequences, so it’s important to discuss these strategies with your financial advisor.

Types of Cash Value Insurance

There are several types of cash value insurance policies:

Pros and Cons of Cash Value Insurance

Pros

Here are some potential advantages of cash value insurance:

• Lifetime coverage: Cash value insurance provides coverage for the entire duration of your life as long as you pay the premiums.
• Cash accumulation: The cash value account grows tax-deferred and can be used for a variety of needs such as supplementing retirement income or paying for college expenses.
• Borrowing flexibility: You can borrow against the cash value account without needing to go through a lender.
• Stable premiums: Whole life insurance policies have fixed premiums, which can make it easier to budget for over time.

Cons

Here are some potential drawbacks of cash value insurance:

• Higher premiums: The premiums for cash value insurance are higher than that of term life insurance policies which provide strictly death benefit coverage.
• Complexity: Cash value insurance policies can be complex and difficult to understand, especially the different investment options and underlying fee structures.
• Lower returns: The returns on the cash value account may not be as high as other investment options due to the restrictions imposed by the life insurance company.

Is Cash Value Insurance Right for You?

Cash value insurance can be a good option for individuals who want lifelong coverage and the ability to build cash value over time. It can also be useful for those who have a high net worth and are looking for a tax-advantaged way to transfer wealth to their heirs.

However, cash value insurance may not be the best option for everyone, especially those who are looking for lower premiums or who do not need lifelong coverage. It’s important to discuss your financial goals and constraints with a financial advisor to determine if cash value insurance is right for you.

FAQ

What happens if I stop paying premiums on my cash value insurance policy?

If you stop paying premiums, the policy may lapse, which means you will no longer have coverage and the cash value account will be used to cover the premiums until it is depleted.

Can I borrow against the cash value account?

Yes, you can borrow against the cash value account, but you will need to pay back the loan with interest, otherwise it will reduce the death benefit.

Are there tax consequences to taking loans or making withdrawals from the cash value account?

Yes, there may be tax consequences, especially if you take out loans or withdrawals beyond the amount that you have paid in premiums. Be sure to discuss these strategies with your financial advisor to minimize any potential tax liability.

How does cash value insurance differ from term life insurance?

Term life insurance provides death benefit coverage for a specified period, while cash value insurance provides lifelong coverage in addition to building a cash value account. The premiums for cash value insurance are also typically higher than that of term life insurance.

What happens to the cash value account when I pass away?

When you pass away, your beneficiaries will receive the death benefit from the policy, which is typically tax-free. However, any loans you have taken out from the cash value account will reduce the death benefit if they are not paid back before your passing.

Do I need to have a medical exam to get cash value insurance?

Generally, yes, you will need to have a medical exam to qualify for a cash value insurance policy. The underwriting process for these policies is typically more extensive than that for term life insurance.

Conclusion

Cash value insurance is a type of permanent life insurance that provides lifelong coverage while also allowing you to build a cash value account over time. While it may not be the best option for everyone due to the higher premiums and complexity of the policies, it can be a good choice for those who want lifelong coverage and the ability to build savings over time. Be sure to discuss your financial goals and constraints with a financial advisor to determine if cash value insurance is right for you.