As a family caregiver, you devote endless energy and resources to your care recipients. So, exploring life insurance that builds cash reserves makes smart sense. Cash value life insurance allows growing an asset to fall back on when needs arise while providing a critical death benefit. Understanding how these policies work places the power of preparedness behind all you do for your family.
Cash value life insurance is a type of policy that combines life insurance coverage with a savings component. As premiums are paid, part of the money goes towards the life insurance benefit, while the rest is allocated to a cash value account that grows over time. This cash value can be borrowed against or withdrawn for various needs, offering a financial resource during the policyholder's life. These policies, which include whole life and universal life insurance, typically have higher premiums than term life insurance due to their investment component. They are often viewed as long-term investments, offering tax-deferred growth of the cash value and a death benefit to beneficiaries.
Several types of life insurance policies offer a cash value component. The most common ones include:
Each of these policies has unique features, benefits, and risks, and the choice depends on individual financial goals, risk tolerance, and the need for flexibility in premiums and benefits.
Cash-value life insurance is a unique financial product that serves as both a life insurance policy and a savings or investment tool.
When you pay premiums on this kind of policy, part of the payment covers the life insurance component, providing a death benefit to beneficiaries, while the remaining part contributes to the policy's cash value, a savings or investment account within the policy. This cash value grows over time, either through a fixed interest rate, the performance of investment options, or based on an equity index, depending on the type of policy, and this growth is typically tax-deferred. Policyholders can access this cash value through loans or withdrawals, which can be a handy resource for various expenses, but such actions may reduce the death benefit.
The policy might offer flexibility in premium payments and death benefit amounts, especially in universal life policies. However, if loans against the cash value aren't repaid, it could lead to the policy lapsing, potentially with tax implications.
Cash-value policies generally have higher premiums than term life insurance and can involve additional fees. They are often seen as long-term commitments, as the benefits are maximized over time. The policy may also have a maturity date, at which point the cash value might be paid out.
If surrendered, the policyholder receives the cash value minus any surrender charges. Given the complexity and long-term nature of these policies, consulting with a financial professional is advisable to ensure they align with your financial goals.
The built-up cash value belongs to you. After a couple of years, you can access these funds in several ways if your policy permits. Speak to your insurance provider and ask any questions about accessing your assets.
You may make withdrawals from the cash value to use for any purpose. But taking money out reduces your death benefit. It also decreases the cash value left to earn interest going forward.
If permitted, you might make periodic withdrawals to supplement retirement income. Or tap cash value to pay for major expenses like medical bills, college, starting a business, or home repairs.
Instead of surrendering policy value permanently through withdrawals, policy loans allow access to cash without reducing your coverage.
A caregiver borrows against the cash value and pays interest on the loan balance. As long as you repay the loan, there is no decrease in death benefit or built-up cash value. Failing to repay the loan can put the policy at risk of lapsing.
Many universal and whole-life policies permit loans once sufficient equity exists. Loans avoid taxes and early withdrawal penalties that happen when cashing out other types of savings accounts.
Be aware that withdrawals and loans can impact your policy guarantees and increase the risk it might lapse if you can't pay the premiums later. Ask your insurer about restrictions against borrowing or withdrawing too soon after purchase.
Surrendering a cash-value life insurance policy for its lump sum cash value is also an option. But you will incur income taxes on the amount gained above what you paid into the policy.
If done before age 59 1⁄2, you also face a 10% early withdrawal penalty, much like tapping into a 401k or IRA early. You further lose all future growth potential and death benefits for your family if you cash out entirely.
Some cash value life policies allow using built-up gains to pay part or all of your premium costs. This prevents losing coverage if you struggle financially down the road. Premiums may even vanish at some point if growth is strong.
Remember that premiums paid from cash value rather than out-of-pocket still reduce policy value. So you give up potential earnings on that money in the future.
Term life insurance is an insurance product designed to provide financial protection for a specific period, commonly 10, 20, or 30 years.
Unlike cash-value life insurance, term life is characterized by its simplicity and lower premiums, making it a more affordable option for many people. It offers a fixed death benefit to beneficiaries if the policyholder passes away during the term, but it lacks any investment or savings component, meaning it does not accumulate cash value over time. This is the primary distinction from cash value life insurance, which combines a death benefit with a savings or investment account, allowing the policy to grow in value.
While cash value policies, such as whole life or universal life, offer lifelong coverage and can serve as a financial asset, term life insurance is purely protective, expiring at the end of the term without any return on the premiums paid unless the policyholder has passed away during the term. This makes term life an ideal choice for those seeking temporary coverage, particularly during critical years of financial responsibility, such as raising a family or paying off a mortgage.
Pursuing cash-value life insurance requires learning distinctions from other policy types. But the effort pays dividends in offering financial security for caregiving duties now and in the future. An independent agent can simplify the process for your situation.
With helpful guidance each step of the way, secure coverage with greater confidence, clarity, and peace of mind. Rest assured that cash-value life insurance can provide long-term support so you can focus caregiving efforts where they matter most - on the health and well-being of your loved ones.
