Oftentimes, people think of life insurance as an investment in the future of their loved ones. After all, the death benefit will go to their beneficiaries after they themselves pass away.
But there’s also a form of life insurance that includes a cash value savings component that you can use for your own purposes—a cash value life insurance. Here’s what you need to know.
Cash Value Life Insurance
Cash value life insurance is permanent life insurance. In other words, it lasts for your lifetime (assuming you’re the policy holder). Unlike a term life policy, it doesn’t expire after a certain number of years. It’s important to understand that cash value life insurance is more expensive than term life insurance.
Cash value life insurance features a cash value savings component. Over time, as you pay more into the policy, the cash value builds up. It also earns interest, and taxes are deferred on the accumulated earnings. This means the cash value builds up even further.
You can access the cash value at any time for a range of purposes, for example when you need to “borrow” money from your policy to finance a renovation in your home. When you borrow against the cash value, the life insurance company treats it as a loan and charges interest on the amount you haven’t yet paid back.
You can also withdraw money from the policy. However, because you won’t be paying it back, it usually reduces the amount of the death benefit.
Example of Cash Value Life Insurance
Let’s say you have a policy with a $50,000 death benefit and an accumulated cash value of $10,000. It has no prior cash withdrawals or outstanding loans.
If you pass away, the life insurance company pays your beneficiaries the $50,000 death benefit. And considering that the cash value is $10,000, the real cost to the insurance company is $40,000.
Pros and Cons of Cash Value Life Insurance
There are advantages and disadvantages to cash value life insurance.
Advantages include that it’s permanent life insurance, you can borrow against the cash value, and you can withdraw from the cash value in a tax-advantaged way.
The disadvantages include that the out-of-pocket premiums are more expensive, any withdrawals reduce the death benefit, and any unpaid policy loans with interest are also deducted from the death benefit.
Get Expert Advice on Cash Value Life Insurance
When deciding whether or not cash value life insurance is right for you, it’s advisable to seek out the advice of an independent, expert life insurance broker. Here at Liberty Financial Group, we can objectively advise you on your best options. Contact us for more information.
