Cash Value Life Insurance

Cash value or permanent life insurance life insurance which is designed to be held until your death, whenever that may be. Part of your premium pays for the "pure" insurance coverage and costs and the balance is held by the insurance company in a cash value account. The type of permanent life insurance you purchase (eg, whole, universal, variable) will affect the speed at which the cash value portion of your policy grows. The interest and earnings grow tax deferred until you withdraw funds, and is part of the income-tax free death benefit if you die. However, these policies require a higher cash outlays than term life insurance. 

Who should consider cash value life insurance?

Cash value life insurance is suitable to cover the long-term needs because coverage continues the rest of your life. You do not need to renew your policy at regular intervals, or you must provide proof of insurance (eg, a medical exam), when policy is in place. Cash value insurance allows you to lock in a premium schedule so you do not have to worry about rising premiums as you get older or your health gets worse. 

Benefits of cash value life insurance

As with any life insurance, the purpose of cash value insurance to provide adequate financial resources for your surviving loved ones in the event of your untimely death. Knowing that this protection is in place, allowing you to sleep a little easier at night. 

A cash value policy is equivalent to an annuity in that regard. All interest and earnings on the investment policy is allowed to grow free from income taxes until you surrender the policy or begin to withdraw your money. Depending on the amount credited to the cash value account, you can gather a substantial equity in your cash value policy with a number of years. 

Generally you are entitled to take a loan from the insurance company, secured by the cash value in your policy. A fixed or floating rate will be charged. Remember that if you take a loan against your cash value, death benefit available to your survivors will be reduced by an amount of the loan. In addition, policy loans reduce the amount available and may cause your policy to lapse. Finally, you could face tax consequences if you surrender the policy with an outstanding loan against it. 

With most cash value life insurance, you can take withdrawals from your cash value account. Policy withdrawals may be tax free up to your basis in the policy (the amount you have paid into the policy premiums). As with loans, the amount of the withdrawal from your cash value account reduce death benefit available to your survivors, and the available cash value, n some cases by an amount greater than the withdrawal amount. Different tax rules apply to withdrawals and loans from cash values if the policy is a modified Endowment Contract. In this case, withdrawals and loans are considered made from earnings first, and would be subject to income tax. 

Disadvantages of cash value life insurance

The premiums for cash value insurance usually cost more than for an equivalent amount of term insurance in the first year of this policy. The reason is that with a cash value policy, you are starting to pay more than is currently needed to pay for insurance, so you can build a fund (cash value account) to help offset the higher insurance costs you need to pay when you are older. 

When you purchase a variable life insurance, the underlying investments in the cash value account expose you to possible financial losses and economic benefit. It all depends on how the investments fare. Any losses would cut directly into your cash value account and can affect the amount of death benefit, although a minimum funeral grant is normally secured. (Guarantees are subject to paying ability of the insurer.) Now with the invention of Equity Linked Life Insurance is now a way to participate with the potential head of the market without a degree of uncertainty.