Cash Value Insurance
Cash Value Insurance - Insurance that, in addition to paying out a death benefit, also accumulates cash value over time which may be withdrawn after a certain period.
More detail on Cash Value Insurance
Cash value life insurance policies come with a higher premium than other life insurance policies and this is due to the fact that part of your premium is put into an interest-bearing account for you-tax free-which becomes available to you after a certain period of time. These insurance policies are generally lifetime policies rather than term life insurance which is coverage planned only for a certain period of time (5, 10, 15, 20 years).
The Cash Value Account
All life insurance policies are somewhat different so you will want to check the specifics of a cash value life insurance plan before you sign any paperwork. A cash value policy pays part of your premium into an account for you where your money makes interest and grows for you until a certain amount is reached (again, check your policy). Once that amount is reached, you have the option of stopping premium payments altogether and keeping your insurance policy, or you can continue to pay into it to grow the cash value of the account. Technically this money is used in the same way a bank uses the money you put there in savings. The insurance company invests with it to their own ends while keeping your principal safe for you. This cash value account also has the advantage of helping to pay the higher costs of insuring you as you grow older, so your premiums do not increase.
Your Benefits From the Cash Value Account
Once you have paid into the cash value account for the specified period you have several options of what you can do with it. You can either:
- Stop making premium payments and let the amount in the account "pay" them for you. This does not decrease the principal amount in your account and keeps your life insurance policy active for you for the rest of your life for 'free'.
- Continue making premium payments which will grow your cash account significantly for the future. Many people like to think of it as a second retirement account which, after a long enough period of making payments, could equal several hundred thousand dollars.
- Take Out Loans From the Account. This has the effect of making you your own lender. You can borrow money from the account, which may be taxed, and you do not necessearily have to pay it back. If you choose not to pay the loan back, the amount borrowed plus interest will be deducted from your death benefit if you die.
Other Things to Consider
Cash value life insurance policies have the added benefit of the extra account for your use once you have reached a certain amount deposited, but the higher premiums are criticized for some as not being worth it. Many agents recommend simply using a term life insurance policy and taking the savings in premium amount and investing it in other retirement portfolios to achieve the same effect as the cash value account. The downside to this, however, is that if your term policy reaches its natural end, renewing it or getting another policy could be significantly more expensive based upon your age. One of the benefits of a whole life, or cash value policy is that your premiums will not change as you get older, so if you begin a policy when you are relatively young, you will be paying next to nothing (or literally nothing) for life insurance through the rest of your life. The increased premium that you pay now could balance out later in life when others are paying higher premiums to renew their term life policies - and do not have the cash value account. Another consideration for cash value insurance is that there may be a substantial penalty for canceling your policy early. Early is defined as the period before your cash value account is fully paid for. Once your cash value account has matured through your making enough premium payments, you may cancel your account at any time, though doing so may not be the wisest move since you have already invested a good deal of money into the policy and essentially may now keep it for the rest of your life without paying another dime.
