A cash value component in a life insurance policy may not be worth the amount of premiums. Find out why.
We’re all aware of term life policies where the policy is in force for a specific term, and when the term ends, the death benefit is given out to the beneficiaries. These policies only benefit when the policyholder dies- but what if you could use some of the money while the policyholder is alive?
Let me tell you that it is very much possible!
The cash value component in a life insurance policy makes it possible. But let’s walk through the basics.
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What is the Cash Value of a Life Insurance Policy?
Cash value is simply a component attached to a permanent life insurance policy, including an investment feature. Over time, when the policy matures, this cash value account tends to grow on a fixed interest rate.
The death benefit is only given after the policyholder dies; the cash value can be withdrawn or borrowed to use during the policyholder’s life. This accumulated amount can then be used to source loans, pay for significant expenses lined up, or even pay the remaining premiums.
When the policyholder dies, the agreed death benefit will be given to beneficiaries, but what about the accumulated cash value?
If the policyholder doesn’t use it, it will go back to the insurance company! So if you have the accumulated cash value, make sure you use it during your life, or else it will be a waste for you.
Example of Cash Value in Life Insurance
I understand all this talk about cash value may have become too complicated, but let me make it easy by a real-life example with numbers!
Dave is a 50-year old healthy male who opts for a whole life insurance policy: with a $30,000 death benefit and an accumulated cash value which will grow with time. He didn’t withdraw or borrow the cash value during the policy, which had become $8,000.
Dave dies, and his beneficiaries receive the full death benefit of $30,000. And the cash value of $8,000 will go back to the insurance company. Good for them, because now they had a total liability of $22,000 instead of $30,000. But sucks for Dave, though.
Life Insurance Policies with Cash Value
Only permanent life insurance policies have a cash value component like whole life insurance, variable life, and universal life insurance. These three policies are widely known as cash value life insurance.
Whole life insurance is a permanent life insurance policy that gives lifetime protection to policyholders and a guaranteed death benefit. Along with this, it also has a cash value component that the insured can borrow or withdraw during their life too.
Universal life insurance policy is also a type of permanent life insurance with flexible premiums and adjustable death benefits, as long as there is enough money in the cash value account to cover the policy.
A variable life insurance policy has a death benefit component and a cash-value account, which is invested in several sub-accounts in the policy. The cash value account is tax-deferred, so if the policyholder wishes to cash in life insurance while still alive, they could do so through a tax-free loan.
Cash Value Life Insurance Calculator
Cash-value life insurance cost and premiums rate is calculated through an online algorithm that allows policyholders to enter the necessary information.
Policy Genius has an online calculator that asks for age, cost of insurance, coverage amount, type of policy, etc., and then calculates the amount for you.
The cash value account grows through a fixed interest rate depending upon the market, provided that the premiums are promptly paid. If that is the case, some portion of the premiums goes to the cash value component, which makes it grow over the policy years.
Best Cash Value Life Insurance
According to Benzinga, here is a list of the best cash value life insurance companies of 2020:
- Best for Financial Strength: Northwestern Mutual
- Best for Local Agents: State Farm
- Best for Children: Mutual of Omaha
- Best for Selection: Pacific Life
- Best for Whole Life Insurance: MassMutual
These companies have been handpicked, considering their authenticity, years of experience, and consumer satisfaction.
Is Cash Value Life Insurance a Good Idea?
It all comes down to the deal-breaker question: is cash value life insurance a good idea after all?
There is no straight answer to this; let me be honest. The answer to this question lies in your requirements and needs and why you opted for a life insurance policy in the first place.
We’re all aware that term life insurance is a cheaper option than whole life because of only limited years of protection and only a death benefit. So if you only want to create a financial legacy and protect your family after you die, a term life insurance policy is probably best for you.
But do you have significant expenses soon? A house downpayment or a requisite debt? Sending your kid off to college or getting them married? If so, you need an accumulated cash value account that you can use while you’re alive, and that too tax-free!
Because of this, the premiums are higher, which can shake off your monthly budget. So as much appealing, it sounds to have a cash value, make sure you know the premiums will be a lot higher. Also, the cash value component grows slowly over time, so when you want to withdraw it, it might not be as big and mighty as you expected it to be.
By considering everything, especially your needs, you should head to an insurance company or an experienced insurance agent to understand better your needs and what type of policy will suit you best. Even if you’re only interested in the cash value component, you will have an option to choose between whole life, variable life, and universal life insurance policies based on your needs. Of course, the trick to keep the policy in force is paying premiums regularly!
Another advice is to shop around! Don’t just put your finger on the first insurance company or the first policy you come across. Many companies believe in altering some parts of the policy to meet clients’ needs or offer them discounts they may be eligible for. So make sure you avail of such opportunities, and those will be possible if you skim through the market.