Life insurance’s most important task is to provide financial support for those who depend on you in the event of an unfortunate event. All life insurance includes a death benefit that can be used to fulfill this role. However, certain types of life insurance also have cash value.
What is cash value?
A cash value policy is a policy that pays a premium. Part of the money you pay stays with the policy and earns interest over time. This is called cash value. This is the amount you would get if your policy was canceled (less any surrender fees).
While some policies include a cash value component of the death benefit, others don’t. To confirm the type of policy you have, check your policy or speak to your agent.
Different types of cash-value life insurance
Permanent policies include whole and universal life and offer lifetime coverage. They also have cash value. The type of policy determines how the cash value accumulates.
Your whole life
Pre-determined and guaranteed whole life cash values. The cash value is guaranteed and grows at a conservative pace in exchange for these guarantees.
Fixed life expectancy (UL)
Fixed universal life (UL), which credits the cash value at a rate that is determined by the insurance company according to market conditions, credits the cash value. The rate may fluctuate over time, but it will not be lower than the guaranteed minimum.
Indexed UL earns a rate that is tied to a market index like the S&P 500(r), which has greater upside potential than other types. The rate can be lower if the market is performing poorly but you don’t risk losing your investment in the market.
Variable UL cash value is determined by market performance and the investment options selected by the policy owner. These policies can lose money.
Also Read: What is Return of Premium Life Insurance:
Six ways to make the most of your cash value
Cash value is a valuable financial tool that can be accessed in many ways. However, you should always ask your agent about the details so as to avoid unintended consequences.
1. Premiums for policies
You can also use cash value to pay part or all of your premiums on your life insurance policy.
2. Get a loan
A loan can also be taken out of your policy. You can get a loan from your policy at a lower rate than a bank loan.
These loans don’t need to be repaid, but interest will continue accruing. Your policy will be terminated if the outstanding loan balance, including interest, exceeds the cash value. Avoid this situation by paying the interest each year, or keeping an eye on the situation to take appropriate action if necessary.
Unpaid loans will reduce the death benefit if the insured person is unable to pay them.
3. Make a withdrawal
You can also withdraw cash from your account, either for an emergency or to help you get through a difficult time. However, withdrawals can reduce your death benefit so make sure to consult your agent before you pull that trigger. As long as the amount you withdraw is less than what was paid in, there are no taxes.
4. You can supplement your retirement
Your retirement portfolio can be enhanced by cash value life insurance. It can grow faster because it is tax-deferred. However, it may still take some years for it to become a significant asset.
You may also be able to get part of or all the death benefit for terminal illness or long-term care. This can help you protect your nest egg.
5. Surrender your policy completely
You can cancel your life insurance policy at any time.
All money received that exceeds the amount you paid into the policy is subject to ordinary income tax. If you surrender $12,500 and paid $10,000, your tax rate will be $2,500.
6. Sell your policy
You may be able sell your life insurance policy to a settlement company as an alternative to giving up your life insurance policy. The company will assume the payments and be the beneficiary of the policy.
You will be taxed for any excess premiums paid, just like a surrender. However, you should still be able to walk away with more than a surrender. The process can be tedious and it might be difficult to find a buyer.
These options make life insurance not only a great way to protect your family but also a flexible financial tool that can be used over time.