When the time comes for you to purchase life insurance, there are many different options available that it can become overwhelming very quickly. Add that to the fact that there are many terms that can be confusing, talking life insurance can easily leave you with more questions than answers.
Typically, you get life insurance for the sole purpose of protecting your loved ones if your unexpected death occurred. You make monthly premiums to secure an amount of money (the death benefit) that would go to the designated survivor (beneficiary) upon your death. Then, he or she can use that money to pay funeral expenses, cover any remaining debt, or have a bit of money left over to live a secured life.
But there is a lot more to life insurance than simply the death benefit and beneficiary. In fact, many people purchase life insurance as an investment tool or additional beneficiary money. Let’s take a look at cash value life insurance and how it can benefit you.
What is Cash Value Life Insurance?
When talking about cash value life insurance, it is actually permanent life insurance that has a cash value component to it – similar to a savings account. The types of insurance that fall under permanent include whole life, variable life and universal life. You still have the same outcome as with all insurance plans – to provide the beneficiary with the death benefit upon your unexpected death – but you now have that savings portion attached.
The cash value accumulates over each premium payment. With each payment you make, a portion will go towards the cash value. Although these types of life insurance policies have higher premium rates than a term policy (but term doesn’t have the cash value component), there are benefits for going with a permanent insurance policy.
Add to the Death Benefit
The accumulated cash value can be used to boost the death benefit on your insurance policy. If you don’t plan on using the cash value for yourself (described below), it is best to use it to increase the size of your death benefit. You will leave behind, then, more money for your beneficiary to use where he or she sees fit.
Borrow Against Your Cash Value
If you run into an emergency, looking to make a large purchase or want to pay off some loans, you can borrow against your cash value. Basically, you take out a loan on your life insurance policy. Borrowing against your cash value is tax-free, which makes it ideal for policyholders.
However, there are a few things to note if you take this route. Borrowing against your cash value is treated as a loan to the insurance company. When you take this money, they essentially are losing money. You are then charged interest on that amount until you pay it back. If you choose not to pay the loan back, which you can, the insurer will take from your death benefit if you die.
There will come the point when the cash value does become taxable, and that is upon your death. If there is an outstanding balance on your cash value from borrowing against it, that now becomes taxable. It is best to speak with an accountant or financial advisor if you plan to take out the cash value.
If a cash value (permanent) life insurance policy is something that interests you, speak with your trusted insurer. Get all the details in regards to the plan you are looking at. Make sure you fully understand what the cash value component all entails, and how you can access it. In the end, if you do nothing with the accumulated value, it will go back to the insurer. So, either use the value on yourself, or secure your beneficiaries future even more by adding to the death benefit.