(800) 253-1482What Is Cash Value Life Insurance and Is It Right for You?
Summary: Cash value life insurance can help you build value now while also providing a death benefit when the insured party passes away. There are different types of plans available and while you can borrow or withdraw from your cash value, you’ll need to understand the effects this has on your tax bill and death benefit. Cash value life insurance policies have many pros and cons depending on your financial needs. To determine whether or not a policy is right for you, it’s best to compare your options with a licensed insurance agent. Estimated Read Time: 7 mins
Table of Contents:
- Finding the Right Type of Cash Value Life Insurance Policy
- How Does Cash Value Life Insurance Work?
- How To Withdraw Cash Value From Life Insurance Policy
- Compare Cash Value Life Insurance Quotes in Texas
- Why Is Cash Value Life Insurance Bad?
- Is Cash Value Life Insurance a Good Investment?
- Which Type of Life Insurance Policy Generates Immediate Cash Value?
- Is the Cash Value of Life Insurance Taxable?
- How To Calculate the Cash Value of a Life Insurance Policy?
Cash value life insurance is a type of permanent life insurance with a savings component that lasts for the policyholder's lifetime. The policyholder can borrow from or withdraw cash from this value or use it to pay premiums.
Whole-life and universal life insurance policies accumulate cash value over time but are typically more expensive than term life insurance because they do not expire after a set number of years.
While the cash value of life insurance can be a helpful financial tool, borrowing against or withdrawing from the policy reduces the death benefit.
Therefore, you’ll want to think long-term before making any decisions.
Everyone has different needs both present and future in terms of what their coverage will need to achieve.
The right life insurance policy can help with retirement, cover major life expenses, and of course, cover final expenses.
Working with an agent is a great way to determine whether or not life insurance with cash value is right for you.
Below, we’re looking at the different types of plans available, how they work, and comparing quotes online.
Finding the Right Type of Cash Value Life Insurance Policy
When you break down cash value life insurance, you’ll notice there are many different types of coverage available. Each is a great tool depending on your needs. Here is how each type of plan breaks down:
- Whole Life Insurance: Offering permanent coverage, cash value whole life insurance policies are some of the most common plans utilized by policyholders. Your coverage offers both a cash value, as the name suggests, along with a death benefit.
- Universal Life Insurance: UL also provides permanent coverage, a death benefit, and builds cash value, however, you can adjust your premiums and death benefit to your needs with these types of plans.
- Variable Life Insurance: VLI is similar to UL policies but the main feature is the investment component. It’s always recommended to work ith a licensed financial professional before investing and your account will come with risks, however, you can build more value through your investments over time.
How Does Cash Value Life Insurance Work?
Cash value life insurance uses part of each premium to pay for your insurance but the rest of it accrues the cash value account, earning tax-deferred interest.
Policyholders who keep their premium current continue to grow their accounts.
Policies come with two core components:
- The death benefit is how much beneficiaries are paid when the insured person dies. It is also known as the "face value" of the policy.
- The cash value is money policyholders can access before they pass but if it isn't repaid, beneficiaries receive a smaller death benefit.
How To Withdraw Cash Value From Life Insurance Policy
Withdrawing money from cash value life insurance policies is possible but there are many different ways of going about it that will affect your tax bill and death benefit. Here’s how it all works:
Simply Withdraw Your Cash
Most policies allow policyholders the option to withdraw cash. This can be done on a partial surrender or withdrawal basis and reduces the death benefit.
Depending on your life insurance plan, you may have unlimited withdrawals available while others have a limit on the number of times you can take money out.
These limits may be per term or year and some policies cap the overall withdrawal amount.
Keep in mind the excess amount withdrawn is taxed as ordinary income, meaning that if you withdraw more than what you’ve paid into the cash value, you'll need to be prepared when filing.
Take Out a Loan
Many cash-value life insurance policies allow policyholders to take out loans. Like other forms of withdrawing cash, the death benefit is reduced as a result if it is not repaid.
The good news is that the loan comes with an interest rate that is typically lower than traditional loans but the bad news is that there is still interest being charged.
You can restore the full death benefit by paying back the loan’s principal along with accrued interest before the time of death for the insured party.
Cover Your Premiums
Looking to cover your policy’s premiums? You can access its cash value to do so.
Depending on the terms of your policy and the amount of cash available, some policyholders can simply stop paying out of pocket and use the cash value to cover the rest of the premiums for the life of the policy.
Surrender Your Policy
Surrendering your life insurance policy simply means canceling it, so you won't have coverage anymore. When you do this, your life insurance cash surrender value is what you've paid into the cash value plus interest.
However, the carrier may subtract any loans or unpaid premiums. There might also be fees that reduce the amount you get. Additionally, you could owe income tax on the money you receive.
Compare Cash Value Life Insurance Quotes in Texas
In Texas, you have no shortage of options for life insurance with a cash value but everyone is different.
It’s important to compare plans and carriers to find the best coverage for your needs along with the most affordable rates available.
Helping Texans prepare for the present and future is exactly why Freedom Insurance Group partners with top-rated life insurance carriers that help provide a personal approach to protecting your finances.
Get your free, no-obligation, cash-value life insurance quote online to compare the best policies near you in just a few clicks.
Why Is Cash Value Life Insurance Bad?
Depending on who you ask, some may associate cash-value life insurance with negative connotations, however, the truth is a bit more complicated.
Like most things in life, these policies have drawbacks to consider along with positive qualities that will vary from person to person.
Every policyholder has different coverage needs and budgets to consider. There are cash-value life insurance pros and cons you’ll want to assess before signing your contract.
Here are some of the cons of a cash-value life insurance policy:
- More Expensive Than Term Life: In most cases, cash value policies can cost much more per month than term life coverage.
- Loans May Reduce the Death Benefit: Having the option to borrow or withdraw money is great, however, if you withdraw all the cash value and stop paying premiums, the coverage ends, leaving you without life insurance.
- Tax and Interest Complications: Taking out more than your premium payments can make your life insurance taxable, with income tax owed on the excess. Furthermore, there is still interest on loans to consider, and if you end up paying off your policy in seven payments or less, your policy becomes a modified endowment contract (MEC). Once it’s a MEC, the policy is subjecting cash value growth withdrawals to income tax and there’s even a penalty if you're under 59 1/2 years old.
- Building Cash Value Takes Time: It can take years to start building cash value and even longer to see substantial growth, depending on your payment schedule, fees, and cash value allocation.
Is Cash Value Life Insurance a Good Investment?
A cash-value life plan may not be for everyone but several benefits can help you prepare for expenses now and at the time of the insured’s passing. Here are the pros to consider:
- Builds Wealth Alongside Protection: Over time, the money in your cash value account might grow more than what you paid in premiums. It's like owning a house and building up equity with your payments.
- Tax-Deferred Growth: You won’t owe income tax on your cash value gains as long as you keep the money in your policy. Even if you borrow from it, you won’t owe income tax on the loan.
- No Annual Contribution Limits: Unlike some other investments such as IRAs, there's no limit to how much you can put in each year.
- Flexible Use of Cash Value: You can borrow, withdraw, or use your cash value to pay premiums. You can also surrender the policy for cash, though you'll lose the life insurance coverage if you do.
Which Type of Life Insurance Policy Generates Immediate Cash Value?
If you're looking to immediately build cash value, single premium whole or universal life insurance policies are viable options.
In addition to building a cash value, these policies also offer lifetime coverage.
Keep in mind that instead of paying regular premiums, your coverage is paid for with a single upfront payment, so you'll need to be able to afford this initial cost.
Be sure to compare plans and carriers with a licensed agent to determine which type of coverage is right for you.
Is the Cash Value of Life Insurance Taxable?
In most cases, cash-value life insurance isn't taxed. However, beneficiaries get the death benefit tax-free, but not the cash value.
As a policyholder, you usually pay taxes on the cash value only if you take out more than you've paid in premiums. Here's when your cash value might add to your tax bill:
- If you borrow from your life insurance, the loan isn't taxed. However, if the policy ends before you repay it, you might owe taxes.
- You can withdraw the total premiums without tax. However, any gains, like dividends, are taxed as regular income.
How To Calculate the Cash Value of a Life Insurance Policy?
You can easily determine the value of your policy by subtracting your surrender fees from your total payments.
Keep in mind that whatever you sell your cash value life insurance policy for will be lower than its death benefit. The easiest way to determine the value of your policy is to simply contact your carrier.
