A cash-value life insurance policy is one that accumulates a cash value that can be accessed in addition to the death benefit.
A significant portion of your premium is used to fund the policy’s value early in its life. As you get older, more of your premium goes toward your actual insurance costs.
What is Cash Value Insurance For?
Cash value insurance allows you to accumulate value in your insurance policy over time. In many cases, the accrued cash value can be borrowed or withdrawn, or it can be used to pay policy premiums in your later years. Nowadays, many online life insurance providers allow you to buy cash value insurance easily.
How Does Cash Value Insurance Work?
Your premiums for a cash value policy are typically set at a fixed rate. A portion of your premium is used to pay for the death benefit. Another portion is used to fund your policy’s cash value.
Most of the time, the cash value does not begin to accumulate until 2-5 years have passed. When a cash value begins to accumulate, it becomes available to you in accordance with the terms of your policy.
That cash value is only available during your lifetime. If you die, your beneficiaries will receive only the “death benefit”. In that case, any cash value would be returned to the insurer.
When Should You Buy Cash Value Insurance?
Cash value insurance premiums can be significantly higher than term life insurance premiums. Cash value policies, on the other hand, can accumulate significant value over the course of 15 or 30 years.
When you are in good health and under the age of 35, purchasing a cash value policy can provide a substantial nest egg that you can use as needed.
Using Your Cash Value Life Insurance to Your Advantage
Because you can only benefit from the cash value of your policy while you are alive, it is critical that you use it while you can.
Cash-value life insurance policies can be used to obtain a loan to pay off a mortgage early, cover a child’s college tuition, or take a vacation.
If you do not repay the loan and all interest before your death, your death benefit will be reduced by an amount equal to the loan balance plus fees.
Withdrawal or Surrender
You may be able to take a portion of your cash value as a partial withdrawal if you have universal life insurance.
This is not the case with a whole life policy, where the only way to access the cash value without lapse is through a policy loan.
You could also surrender your policy entirely, taking the cash value but losing your potential death benefit.
There is usually a fee for accepting a cash payment, which varies and may be different for a withdrawal vs. a surrender.
Death Benefit or Premium Application
Some policies allow you to direct your cash value balance toward premiums (a useful option once you retire) or to request that your death benefit be increased.
A cash value policy allows you to use accrued funds in a variety of ways during your lifetime while still providing a substantial death benefit to your heirs.