Cash value life insurance is a term that applies to most permanent life insurance policies.
With cash value insurance, policyholders enjoy a growable and accessible asset in a cash value account, in addition to a death benefit. But how does this type of policy differ from term life insurance and what can policyholders do with their cash value?
This brief guide will explain how cash value insurance works, which policies it generally applies to and how insureds can access their policy's cash value.
Unlike term life insurance, which only offers a death benefit, accrued cash from a cash value policy can be withdrawn or borrowed against while the insured is still alive, helping provide financial security in case of an emergency or unexpected expense.
Certain policies accrue cash value differently than others. Here are a few examples:
For this type of policy, cash value accumulation grows at a guaranteed, fixed rate of return that's set by the insurance company. Growth can be modest with whole life insurance, but it's steady. There's also generally a higher premium compared to other types of permanent policies, as a portion goes towards building cash value.
A universal life policy offers more flexibility in terms of premium payment amounts and death benefits than other types of life insurance and starts to generate immediate cash value from the first payment. Cash value growth is tied to the policy's interest crediting rate, which is influenced by prevailing interest rates and investment performance. Some universal life policies offer a minimum guaranteed interest rate that ensures a baseline of growth for the cash value account.
Variable life insurance allows policyholders to invest the cash value in a variety of investment options such as stocks, bonds and mutual funds, and cash value growth depends on the performance of those investments. Because of the nature of these investments, this type of policy typically carries more risk, however, there's potential for higher returns compared to other policies.
IUL offers cash value growth linked to a specific stock market index, such as the S&P 500. The policy's cash value grows based on the performance of the chosen index. It's often subject to certain limits and participation rates set by the insurance company. IUL provides the opportunity for higher growth potential than traditional universal life insurance but with downside protection.
One of the main draws of cash value insurance is that there are ways for policyholders to access the policy's value while they're still alive. This comes in handy to deal with unexpected expenses, such as medical bills or necessary home repairs.
In such cases, there are a few ways that people can take advantage of cash value:
Permanent policies that accumulate cash value, and convertible life insurance policies that can be changed to one that accrues cash value, are the better options for life insurance if a policyholder suspects they may need to access the cash at some point.
Term life insurance does not accrue cash value, therefore it cannot be borrowed from.
Like any investment, cash value insurance policies do carry a few implications. However, when they are managed responsibly and within reason, there typically isn't anything major to worry about. That said, here are a few good-to-knows about cash value life insurance:
Cash value life insurance is a classification that includes a variety of permanent policies. Like any type of life insurance or investment, they can offer a lot of value but come with a few drawbacks as well. At any rate, it's important to understand the different types of life insurance policies available to make the best decision.
To learn more about cash value life insurance, how it compares to other policy types and what makes the most sense for you and or your organization, contact Lewis & Ellis today.