You will encounter lots of jargons in life insurance, but it doesn’t have to be complicated. For instance, you will be offered two different types of insurance coverage including term life and permanent life insurance. Dissecting the latter, it stems to even more multiple types of permanent life such as whole life and universal life policies. That’s where the cash value appears.
What is a cash value?
Whole life and universal life policies offer cash value benefit, which you can turn to good use after having the policy for several years. This benefit is something you cannot avail from a term life coverage. That being said, it makes plenty of sense to consider permanent life insurance if you are looking for a policy that comes with an investment. This is a great way to maximise the use of your policy while you are still alive. However, the compromise is that you will have to pay a higher premium to avail cash value life insurance.
But, what’s in it for you?
Here’s how it works: the insurance provider will apply part of your premium to your policy in order to fund the death benefit, and then invest the other portion in the stock market to build your cash value. In other words, you are not only protecting your loved ones with a death benefit but you are also investing in your own future.
For instance, whole life insurance credits interest based on dividends declared by the insurance company. So, if the insurance company declares a 10% dividend for the year, your policy is automatically credited with 10%. Similar to the risks of any forms of investment, if the company has a negative return for the year, the policyholder won’t get any return at all.
Going back to the lighter note, here is how you can maximise the use of your cash value while you are alive:
Paying your premiums.
As a general rule, most insurers will only allow you to use your cash value as payment premium after you have owned the policy for at least 12 months. Be careful, though. Doing this when you have universal life policy might cause you to deplete all the cash value built up in your policy, so try to use it as a premium payment only when you need to.
Taking out a loan.
Once you have accumulated a fair cash value build-up, you can easily withdraw some of your it in the form of a loan. However, you will have to pay back with interest. Otherwise, the amount including the interest will be deducted from the death benefit that your beneficiaries will receive.
Partially or fully withdrawing money from your policy.
As a policy owner, you are entitled to withdraw money whether in a partial or full amount from your cash value life insurance. The trade-off is that it will be deducted from the death benefit. In some cases, deductions could cost more than the amount you withdraw. Most insurers would reduce the death benefit on a dollar-for-dollar basis. Hence, if you have a $200,000 policy and you withdraw $50,000 from your cash value build-up, your beneficiaries will only receive $150,000 (or less) death benefit from your policy, depending on the insurer’s rules and regulations.
How long does it take to accumulate cash value build-up?
Considering a cash value life insurance policy can be a great investment, especially if you can afford to pay higher premiums. There’s no instant investment, though. You can expect at least 10 years to accumulate enough funds and access them as cash value. Do not hesitate to speak with your financial advisor regarding the expected amount of time for your cash value policy.