Cash-value life insurance is a type of permanent life insurance with an investment or savings component. The cash value part of the policy accrues interest. You can withdraw it or borrow money against it when you have a financial emergency. Read on to learn more about this type of permanent life insurance.
Permanent Life Insurance Policies With a Cash Value Component
Not all forms of life insurance come with a cash value feature. For example, term life insurance doesn’t include this component. These permanent life insurance policies may have a cash value element:
- Whole life insurance
- Universal life insurance
- Variable universal life insurance
- Indexed universal life insurance
Benefits/Features of Cash Value Insurance
If your permanent life insurance policy has a cash value component, it’ll provide the following benefits:
- Death benefit: This is the money the policy pays out to named beneficiaries when the policyholder dies. It’s usually the “face value” of your policy. For example, if your whole life insurance coverage amount is $500,000, this figure is the death benefit.
- Cash value: This is the investment component of your policy, and you can use it for many purposes while you’re still alive.
When you have a cash value life insurance policy, a part of the premiums you’re paying are for insuring your life. The other component accumulates to create cash value. The cash value grows at a modest interest rate, building up tax-deferred earnings.
The type of permanent life insurance you’re carrying determines how the cash value component accumulates interest.
How to Access Cash Value Life Insurance Funds
The rules for accessing the cash value depend on the type of life insurance policy you’re carrying. There are four different ways to use your accumulated savings, namely:
1. Cash Withdrawal
You may be able to withdraw the saved money tax-free. However, any withdrawal amount exceeding the money you’ve paid toward the cash value portion of your policy will be taxed as ordinary income. Also, don’t forget that withdrawing your accumulated savings diminishes the potential death benefit amount.
2. Borrow Against Cash Value
You may take out a loan the size of your policy’s cash value. The loan amount may include the portion of your premiums paid toward the cash value component as well as the total interest your account has accumulated so far. The borrowed amount isn’t taxable.
Before borrowing against your cash value, keep in mind that the loan accrues interest until you’ve paid it back. Consequently, the accrued interest can decrease the death benefit payable to your beneficiaries when you pass away. Also, if you die before repaying the loan, your death benefit will cover the outstanding amount.
3. Surrendering Your Life Insurance Policy
You may cancel your life insurance policy to leverage its cash value, meaning that you’ll not have life insurance protection anymore. In that case, the cash value portion of your policy, along with any accrued interest, constitutes your equity amount.
Before you can surrender your life insurance policy in this manner, your insurer may deduct funds for any outstanding loan amounts or unpaid premiums. Also, the paid cash value may be subject to surrender fees and income tax.
4. Paying Premiums
Depending on the terms of your policy, you could use the cash value component to pay your life insurance policy’s premium. However, you’ll want to avoid using all the funds in the cash value account. Depleting the money may result in the termination of your life insurance policy.
Cash-value life insurance adds value to your policy as you can use it in many financial emergencies while you’re still alive. Do you have more questions about finding the right, affordable life insurance policy? Talk to the team at Kneller Agency today to get started on your tailored coverage that can help your family through the toughest of times.
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