What Does Cash Value Of A Life Insurance Policy Mean?

What Does Cash Value Of A Life Insurance Policy Mean?

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When we talk about the cash value of a life insurance policy, we refer to the value of an insurance contract; it’s also known as the cash surrender value. This amount is offered to the policy owner when he/she is issued with a life carrier once he/she cancels his/her contract. This term is usually paired with a life insurance or life allowance contract.

The cash value is a specific type of life insurance, where the premium usually remains constant throughout the duration of the policy. A portion of the premium that is acquired goes to the death benefit, while the other portion goes into a cash account that makes the policyholder earn a good interest.

What is the worth of cash value life insurance?

There are two basic options that are available when shopping for life insurance, they are, term life insurance and permanent life insurance. The difference between them is, term life insurance limits the number of years for which you’re covered, and permanent life insurance covers you until you die. If ever you want to liquidate the permanent life insurance, you can do so before you die.

Now, let’s take a look at the differences a little closely:

  • Term life insurance: This insurance, as mentioned before, is viable only for a specific period of time. The time period will go up to 10-30 years. If you’re alive past your term policy then there is no payout towards your beneficiaries.
  • Permanent life insurance: This is also known as universal life insurance and it covers you for the duration of your lifetime. This life insurance offers a very important feature that is known as cash value. Along with a long insurance coverage, your premium expenses will go towards a cash value account, that is, tax delayed over time.

So, the main question is, will it be worth it to build up the cash value with all the extra money that is being invested in a permanent life insurance?

The answer to that is, yes, it’s actually worth it. But to invest in a cash value life insurance policy you will need to have patience. This is because a cash value life insurance has a higher premium than a term life insurance, so cash value will begin slowly and eventually gather up earning speed after the initial few years are completed. If you opt for a cash value policy then you can be assured that the value will grow at a steady rate.

How can you use cash value?

You get to choose to utilize it to cover your premium payments:

This process is also termed as “paid up”. If at all you decide to withdraw a part of your cash value then you may have to continue premium payments to retain the life insurance policy.

You’re able to take out a loan against your policy:

You can do so and also repay the loan with interest, at a rate that is usually lower than a bank loan. You’re not indebted to pay the money back; but in case you’re unable to, the interest amount and the debt amount will be deducted from your death benefit when you die.

You have the liberty to conduct a full or partial withdrawal from your cash value:

This feature depends on your policy and the level of cash value; you need to think twice before making a withdrawal because it will reduce your death benefit. Exactly how much will get deducted depends on your cash value. For some policies, partially withdrawing from your cash value will affect your death benefit in a huge way. For some, it may reduce to an amount that is more than the amount you withdraw.

Cash value as a living policyholder benefit:

As a living benefit, the cash value can be drawn by the policyholder during the course of their life. There are several options that they can access their funds. For most cash value policies, whole and partial withdrawals are possible.

Cash value can also be used to pay off policy premiums. If there is enough cash value, the policyholder can even stop paying premiums out of their pockets and have the cash value account cover the premium expenses.

Conclusion:

Whether you want to follow your dream job, get a promotion, change your career, or even manage your own savings, it’s always important to conduct a proper research about the insurance plans you want to opt for, so that you make an informed decision.

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