What is Cash Value Life 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

What is cash value life insurance, which is also known as permanent life insurance, it’s 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The cash in the policy is able to grow tax-deferred, meaning that there is no tax due on the gain unless or until it is withdrawn by the policyholder.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.

Is Cash Value Life Insurance 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The cash in a permanent life insurance policy can be surrendered, withdrawn, and borrowed by the policyholder.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.

Pros and Cons:

ProsCons
Coverage locked in (provided that premium is paid)More expensive than term life insurance (at least initially)
Premium won’t increaseCash value may grow very slowly
Accumulates cash valueInterest accumulates on unpaid cash value loan balance
Cash grows on a tax-deferred basisBorrowing 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.

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Whole Life Insurance

Whole life insurance is a type of permanent coverage that is intended to remain in force for the entire (or whole) life of the insured. This is the most simple form of permanent life insurance. It offers a fixed death benefit and a fixed premium, and the interest rate for the cash value growth is set by the insurance company

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Universal Life Insurance