Buying life insurance can be overwhelming, especially if you’re doing so for the first time. The options abound, and you might be confused with their different components. Among others, one that you might encounter is the cash value.
Aside from death benefits, life insurance can also be a good investment, especially if you have the right policy. Such is the case when your insurance offers cash value. It makes your insurance an interest-earning investment or savings account.
Read on to learn more about the cash value component of life insurance. Find out why many people consider it the secret asset of their insurance.
What is Cash Value in Life Insurance? With the declining life insurance market, companies are in constant search of ways to offer better value to their policyholders. They make their policies more attractive, and one way they do this is by offering cash value in life insurance.
In a nutshell, cash value is an investment component of life insurance. It is a type of policy that gains interest or other benefits over time. As the policyholder, you have the freedom to use the earnings for whatever you wish, such as paying premiums, investing in real estate, funding your children’s education, or settling personal debts.
Because it offers more benefits, the price is often more expensive than life insurance without a cash value component. It will require a fixed premium over a predetermined time. A portion of the premium will go to the life insurance cost and a percentage is allocated to a cash value account.
Don’t confuse cash value with surrender value. While cash and surrender values will give you money when you need it, they work in different ways. Cash value refers to the interest the policy accrues over time since it’s a form of investment. On the other hand, surrender value is the amount you’ll receive from permanent life insurance if you decide to surrender your policy.
Different Ways to Use Cash Value
With the flexibility of cash value life insurance, there are multiple ways by which you can access and use your investment. For instance, you can partially withdraw from your investment fund. However, take note it will decrease the money your beneficiaries will receive when you die.
Alternatively, you can also take out a loan against your life insurance. The caveat is that you’ll be paying interest for the loan, even if it’s technically your money.
Another way to take advantage of cash value life insurance is to use it to pay for your premiums. Depending on the insurer, you might need to pay a withdrawal fee.
The Benefits of Cash Value in Life Insurance
Are you looking for more compelling reasons to invest in life insurance with cash value? Here are some benefits that can convince you.
Hitting Two Birds with One Stone
With cash value life insurance, your beneficiaries will receive a death benefit while the policy builds cash value over time. Hence, it can be an investment for you while you’re living and for your loved ones when you leave them.
Increase Coverage by Adding Riders
You can make your life insurance more comprehensive not only by adding cash value but also riders. For instance, you can include accelerated death benefits. This way, you can be eligible for the death benefit even when you’re still alive. You can use the money to pay for unexpected expenses, such as medical care.
Enjoy Tax Advantages
Another good reason to add cash value to your life insurance is that you can earn tax-deferred interest. The cash value increases over time because the taxes are deferred on the earnings you have already accumulated.
The Drawbacks of Cash Value in Life Insurance
Despite the good things, it’s also essential to note the shortcomings of cash value life insurance, including those we’ll talk about below.
Compared to regular life insurance, adding a cash value component to your policy can make the premiums higher. The high premium is because part of what you’ll pay goes to an investment, which you can use later on.
Not Paid to Beneficiaries
One of the most significant drawbacks is that your beneficiaries cannot claim the cash value your policy accumulated when you die. Instead, they will only receive life insurance benefits. As such, you need to use the cash value while you’re living to make the most of it. Nonetheless, some policies might allow paying the cash value to a nominated beneficiary, but such might come at a large price.
In sum, cash value can be beneficial in life insurance, especially if you know how to maximise its use. It acts as an investment component while also offering tax benefits. The premium can be higher than a regular policy, but it can yield significant financial benefits for your peace of mind.
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