When it comes to life insurance, there are various options to choose from. One such option is a cash value life insurance policy.
The cash value life insurance policy is a type of insurance policy that offers both death benefits and a savings account component. The account grows tax-deferred and can be used for various purposes, including retirement.
Think of cash value life insurance policy as your personal stock trading account. It’s an opportunity for you to benefit with no risk now and in the future!
If you’re in the market for a permanent life insurance policy, many of them may have cash value features. This article will explain what is cash value life insurance and how to use your savings effectively so as not to miss out on any opportunities down the line!
Here we’ll take a look at what is cash value life insurance policy, how it works, and some of the pros and cons of this type of coverage.
What is Cash Value Life Insurance Policy, and How Does It Work?
Some permanent life insurance policies like whole and universal include a savings component called cash value. When you buy an insurance policy with a cash value, you receive death benefit protection and the opportunity to build cash value.
As you pay your monthly premiums, a specific part of that money goes to your death benefit, part goes to fees, and another part is put into the savings account or investment portfolio. The account gets bigger over time because of the interest and investment. The policy’s cash value grows tax-deferred, so you don’t have to pay taxes on the growth until you withdraw the money.
Because the cash value grows over time, it can provide a source of financial security in retirement or if you experience an unexpected financial need. You can use the cash value money for anything and any purpose you want. The cash value is meant for you, the insured.
If you urgently need cash, you can take out a loan against the cash value or withdraw money from the cash value and use it to settle your emergency.
However, cash value life insurance policies typically have higher premiums than term life insurance policies, but the cash value component can make them a more attractive option for some people. Additionally, if you decide to cancel your policy, you may be able to receive some or all of the cash value that you have built up.
And if you die, your policy’s cash value goes back to the insurer. Your beneficiary does not receive the cash value of the life insurance policy upon your death. They only receive the death benefit.
Example of Cash Value Life Insurance
Jane has a universal life policy on her own life. The policy specifies minimum premiums of $325 per month, but she currently deposits premiums of $500 per month, and the policy has a cash value of $2,900.
The Benefits and Downsides of Cash Value Life Insurance
Cash value life insurance policies have pros and cons that policyholders should be aware of before signing up for coverage.
Pros
- Includes a forced savings vehicle: We all know how hard it can be to save money these days, and most Canadians struggle to keep enough. The cash value life insurance policy obliges the insured to save money. This compelled saving model helps to break the cycle of spending much and saving little.
- The cash value can be used in different ways: You can use your cash value to purchase additional coverage or pay for monthly premiums. You can also choose to withdraw or borrow against the cash value. Whichever way you like, you can use the money.
- The cash value serves as an additional investment vehicle: If you are into investing and buying stocks and you have exhausted all your traditional investment vehicles, a cash value policy can serve as a financial safety net for your household and grow tax-deferred wealth for you.
Cons
However, there are also some downsides to cash value life insurance. As valuable as the cash value life insurance policy is, there are still some drawbacks.
- Expensive: A cash value life insurance policy is much more costly than term life insurance. It is also more expensive than other permanent life insurance policies without a cash value component.
- Complicated: Additionally, the cash value component can be complex, making it difficult to understand how much money you will have available in your retirement.
- Lower returns: Compared to traditional investment vehicles, a cash value life insurance policy has the lowest return rates.
When is Cash Value Life Insurance The Right Choice For You?
Suppose you want more than just a death benefit, grow your money while also protecting your family, or enjoy the peace of mind that comes with knowing you have a plan. In that case, you should consider buying cash value life insurance when shopping around for insurance.
Cash value life insurance is one of the most versatile and flexible tools available to help you meet your financial goals. It can be used as a source of tax-free retirement income, a way to pay for long-term care expenses or to leave a legacy for your loved ones.
The key is to work with a financial professional to find the right policy for your needs and make sure you are comfortable with the risk level. With cash value life insurance, you can have everything you need to secure your financial future.
How to Access the Cash Value in a Cash Value Life Insurance Policy
If you have a cash value life insurance policy, you may be wondering how you can access the cash value. There are a few different ways to do this, and the suitable method will depend on your specific circumstances.
One option is to take out a loan (from financial institutions like banks) against the policy using the cash value of your life insurance policy as collateral. This can be a good choice if you need a large sum of money and don’t want to surrender the policy.
Another option is to take out a loan against the policy through the insurance company. Insurance companies such as Manulife, will determine the interest rate on the loan, which will need to be repaid with interest. Withdrawals of this type are usually only advisable if you are close to retiring or need the money for an emergency.
Finally, you can surrender the policy for its cash value. This is usually only advisable if the policy is no longer needed or the cash value is needed for immediate expenses. Whatever option you choose, please consult your financial advisor to ensure that it is the best decision for your needs.
How to Shop For a Cash Value Life Insurance Policy
When you shop for a cash value life insurance policy, you should keep a few things in mind.
First, you’ll need to choose a policy type. There are two main cash value life insurance types: whole life and universal life, each with different benefits and drawbacks. Whole life policies offer level premiums and guaranteed death benefits, while universal life policies offer more flexibility in terms of premiums and death benefits.
Next, you will also need to decide how much coverage you need and what riders you want to add to your policy. This will depend on factors like your age, health, and lifestyle. Riders can add additional benefits such as coverage for long-term care or accidental death and dismemberment.
Finally, you’ll need to compare policies from different insurance companies in Canada to find the best coverage at the best price. Once you have a good understanding of your needs, you can start shopping around for quotes.
When you shop for a cash value life insurance policy, keep these important factors in mind. Be sure to compare not only the premium but also the features and benefits of each policy. Cash value life insurance can be a great way to provide financial security for your loved ones, but it is essential to do your homework before buying a policy.
What are The Types of Cash Value Life Insurance Policy?
There are two main cash value life insurance types: whole life and universal life.
Whole life insurance is the original cash value policy, offering a fixed death benefit and premiums. Universal life insurance is a more flexible policy, allowing policyholders to adjust their death benefits and premium payments.
Both types of policies build up cash value over time. Still, whole life insurance has a guaranteed rate of return on the cash value, while universal life returns can vary depending on investment performance.
Policyholders can access the cash value through loans or withdrawals, but doing so will reduce the death benefit and may result in taxes and penalties. As a result, it’s important to carefully consider whether taking money out of a cash value life insurance policy is the right decision for your needs.
Whole Life | Universal Life |
Fixed premiums | Flexible premiums |
Higher Premiums | Lower premiums |
Dividends are guaranteed | Interest rates can change over time |
Guaranteed death benefit | May allow you to increase or decrease the death benefit |
Can never become underfunded | May become underfunded and lapse |
Offers cash value to use while alive | Offers potential cash value |
Final Thoughts
Cash value life insurance policies offer many benefits, but they also have downsides.
Cash value provides coverage for your entire lifetime and accumulates wealth that can be used for anything.
However, the policy is more complicated, and the premiums are more expensive.
It’s important to understand these before you purchase a policy. If you decide a cash value life insurance policy is right for you, shop around and compare rates.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
The primary purpose of Money Reverie is to help everyday Canadians make better financial decisions by providing up-to-date financial news and information, reports, product reviews, and government programs.
