What is cash value life insurance?
Affordable life insurance is a type of permanent life insurance that has a financial savings component. The policyholder can use the value of the money for many purposes, such as a source of loans or cash or to pay policy premiums.
key takeaways
- Value life insurance is more expensive than term life insurance.
- Unlike term life insurance, value-for-money insurance policies don’t expire after a certain number of years.
- It is possible to borrow against a life insurance policy for good value for money.
Cash Value Life Insurance
How Cash Value Life Insurance Works
Value insurance is permanent life insurance because it provides coverage for the life of the policyholder. Traditionally, value life insurance has higher premiums than term life insurance because of the value aspect. Most value-for-money life insurance policies require a fixed-level premium payment, part of which is allocated to the cost of insurance, and the rest is deposited into a value-for-money account.
Cash-value life insurance earns a moderate interest rate and taxes are deferred on accumulated earnings. Therefore, the monetary value of life insurance will increase over time. As the cash value of life insurance increases, so does the insurance company’s risk, because the accumulated cash value avoids some of the insurer’s liability.
Cash Value Life Insurance Example
Consider a $25,000 death benefits policy. There are no outstanding loans or advance cash withdrawals and an accumulated cash value of $5,000. In the event of the policyholder’s death, the insurance company pays the full death benefit of $25,000. The money raised in value for money is now the property of the insurer. Because the cash value is $5,000, the actual liability cost to the insurance company is $20,000 ($25,000 – $5,000).
Examples of whole life, variable life, and universal life are examples of life insurance that are good value for money.
Advantages and Disadvantages of Cash Value Life Insurance
The value-for-money component serves as a living benefit for policyholders from whom they can obtain funds. The net cash value of life insurance is the amount left behind by the policyholder or their beneficiary when the insurance company deducts their rates or any costs incurred while owning the policy. There are several options to access the funds. For most policies, partial waivers or withdrawals are allowed, but these may reduce the death benefit.
Taxes on earnings are deferred until they are withdrawn from the policy and distributed. When distributed, earnings are taxable at the policyholder’s normal tax rate. Some policies allow unlimited withdrawals, while others restrict the number of withdrawals that can be made during a calendar year or period. Some policies limit the amounts available for harvest (for example, at least $500).
Most life insurance agreements allow for cash value loans. Like any other loan, the issuer will charge interest on the outstanding principal. The outstanding loan amount will reduce the death benefit to dollars in the event of the policyholder’s death before the loan is paid in full. Some insurers claim that the interest on the loan is repaid, and if not paid, they can deduct the interest from the remaining cash value. Value for money can also be used to pay policy premiums. If there is a sufficient amount, the insured can stop paying premiums out of pocket and have the payment cover the value-for-money account.
