Life insurance is a must-have to cover your final expenses, such as funeral and burial costs. It can also help your loved ones manage future financial obligations like your children’s college education or any significant debts you leave behind, like a mortgage. But did you know that if you have a cash value life insurance policy, it can be beneficial while you’re still alive?
Cash value life insurance is a type of policy that builds value over time, which you can use during your lifetime. You can borrow against it, make withdrawals, or even use it to pay your premiums. However, it’s essential to understand how it works and the fine print that comes with it.
Most cash value life insurance policies are permanent, meaning they don’t have a fixed expiration date and remain in effect as long as you continue paying premiums. This is different from term life insurance, which has a fixed expiration date and rarely accrues cash value. So, if you want lifelong coverage that can also benefit you during your lifetime, permanent life insurance is the way to go.
When you pay into a cash value life insurance policy, your premium funds both the death benefit and the cash value component. In the early stages of the policy, most of your premium goes towards the cash value. As time goes on, more of the premium goes towards the death benefit, which is the amount your beneficiary receives if you die during the policy term.
Your policy’s cash value doesn’t appear right away. It starts to accrue after several years and grows faster after the 10th or 15th year. You can access your policy’s cash value component while you’re alive, but it disappears after you die. Your beneficiaries can only get the death benefit portion if they file a valid death claim.
Accessing your cash value can be done in several ways, such as taking a loan against it, requesting a partial or full withdrawal, requesting an increase to your death benefit without a premium hike, or using it to pay premiums. However, using your cash value can affect your death benefit. If you take a loan or withdraw from your policy’s cash value, the death benefit declines by a corresponding amount plus fees and interest. If you borrow against your policy, you can restore the death benefit by paying it back.
Cash value life insurance policies come in four main varieties: whole life, universal life, variable universal life, and indexed universal life. Each type has its own features, pros, and cons, and it’s crucial to understand them before deciding which one is right for you.
While cash value life insurance offers financial flexibility and tax benefits, it also has some drawbacks. Premiums can be steep, it takes years to build, and it’s usually not a good investment. Loans and withdrawals can also reduce your death benefit or even cause your policy to lapse.
As an investment, cash value life insurance tends to underperform the major stock market averages over long periods. If your primary goal is to maximize your return on investment, you might be better off combining a term life insurance policy with a diversified portfolio held in a mix of tax-advantaged and taxable brokerage accounts. However, cash value life insurance can be useful as it diversifies your net worth and becomes a flexible source of borrowing power over time.
In conclusion, cash value life insurance is a complex product with both benefits and drawbacks. It’s essential to understand how it works and consult with a trusted insurance agent or financial advisor before deciding if it’s the right choice for you.
