What is Cash Value Insurance – Is it a good investment?
Cash value life insurance has been available for nearly 200 years. Over time, individuals and businesses have used this type of policy to not only provide for their loved ones in case of death, but also to accumulate tax-advantaged savings, pay for a college education, purchase a new home, and supplement future retirement income needs.
Cash Value Life Insurance Definition
Cash value life insurance, which is also known as permanent life insurance, is a type of policy that offers both a death benefit and the ability to build up savings or investments. The cash in the policy is able to grow tax-deferred, meaning that there is no tax due on the gain unless or until it is withdrawn by the policyholder.
Unlike term life insurance, which has an “expiration date,” cash value policies will usually remain in force, provided that the premium is paid. This is the case, even if the insured contracts an adverse health condition. Term life insurance does not build cash value.
Pros and Cons: Is it a good investment?
While it is technically not an investment per se, cash value life insurance can provide a long list of financial benefits – and it can do so in a tax-advantaged manner. For instance, because the money inside of a permanent life insurance policy is allowed to grow tax-deferred, it can build exponentially over time.
In some cases, such as with variable life insurance, there is the risk of loss due to poor market performance. In other cases, like with whole life or universal life insurance, there is no risk to the cash – regardless of what happens in the stock market. Because there is no loss to make up for, the cash can continue to build up over time.
The cash in a permanent life insurance policy can be surrendered, withdrawn, and borrowed by the policyholder. If the policy is surrendered, tax will be owed on the gain. However, you can access money from the policy tax-free via a policy loan and withdrawal. This can provide an excellent way to secure tax-free retirement income.
One perceived “drawback” of this type of policy is that the cost is higher than that of comparable term life insurance coverage. But, while this is typically the case at the time of application (especially if the insured is young and in good health), term insurance can actually become much costlier down the road. That’s because, once the coverage expires, the insured may need to re-qualify, based on his or her then-current age and health condition.
|Coverage locked in (provided that premium is paid)||More expensive than term life insurance (at least initially)|
|Premium won’t increase||Cash value may grow very slowly|
|Accumulates cash value||Interest accumulates on unpaid cash value loan balance|
|Cash grows on a tax-deferred basis||Borrowing too much can cause the policy to lapse|
|Cash can be accessed for various needs|
Types of Cash Value Insurance Policies
No type of life insurance policy generates immediate cash value. Cash value grows over time and at a steady pace. The best type of policy to maximize cash accumulation is an index universal life insurance policy.
|Policy Types||How Cash Grows|
|Whole Life||Dividends from the insurance company|
|Universal Life||Set interest rate from the insurance company|
|Index Universal Life||Tracks and index such as the S&P 500|
|Varaiable Universal Life||Tracks a mutual find like investment|
How to Withdraw the Cash Value from a Life Insurance Policy
There are several ways to withdraw cash from a life insurance policy.
Money from a cash value life insurance policy can be borrowed. In this case, interest will continue to be credited to the account as if the full amount still remained. Borrowing cash can allow you to access funds tax-free.
It is important to note, though, that while the money is not required to be repaid, interest will typically still accrue on the unpaid balance. And, if the insured should die before the loan has been repaid, the insurance company will retain the difference from the death benefit that is paid out to the beneficiary.
Cash value withdrawals can be made from a permanent life insurance policy. In this case, any amount of the withdrawal that is more than the amount of the premium paid in will be taxed to the policyholder.
Surrender the policy
There is also the option of surrendering a life insurance policy. In this case, the policy will be canceled, and the cash value paid out. If the amount of cash exceeds the amount of paid-in premium, the overage will be taxable.
Getting quotes and maximizing cash
You can not get a cash value life insurance quote online. Each carrier has there own software where the quotes must be run and they include an illustration with each quote.
There are many insurance carriers that offer cash value policies. But rather than going directly to a particular insurer, it is generally best to instead work with an independent insurance agent like us so that you can shop and compare coverage and premium prices. From there, you can more easily determine which option is best for you.
At Insurance Geek, we work with more than 40 top rated life insurance companies. So, we can work with you to find the right plan for your particular needs – and your budget. We’ve already done all of the shopping for you. So, if you’re ready to see your cash value life insurance possibilities contact us for an illustration today.