How Does Cash Value Life Insurance Work and Do I Need It?

Cash value life insurance is permanent coverage so your premium remains level for the rest of your life and your coverage cannot be canceled, as long as you pay your premiums. It is also known for its cash value. While the term “cash value” sounds great, many people aren’t exactly sure how it works and how it can benefit them. This article will go over the basics of cash value life insurance and detail how it works and how it can grow over time.

Cash value insurance has a higher premium than term life insurance because you pay higher premiums in the earlier years. Depending on your age and situation, the premium can be as much as ten to fifteen times higher. Your premium will consist of the amount needed to insure you as well as an overpayment. This extra premium is set aside by the carrier and invested in various ways. It can be invested in vehicles such as stocks, bonds, mutual funds, or other areas, and most carriers will promise a guaranteed minimum return. Over time, this account grows and you can have a nice sum of money in your policy.

The cash value in your policy can be accessed in a couple of ways.The first way is by borrowing the cash value against your policy. You will be charged interest on the amount that you borrow. The borrowed amount plus interest would be subtracted from the death benefit if you do not pay it back. You may also get the cash value if you choose to surrender your policy. This usually has some type of tax consequences as well.

There are three major types of life insurance that grows cash value:

Whole Life Insurance: This is the basic permanent life insurance. The premium is level for life and there is a minimum guaranteed return on the cash value. You may also receive dividends, depending on which carrier you choose, and if they perform well.

Universal Life Insurance: This permanent coverage has more flexibility than other types because your premium is not fixed. You can pay more towards your policy if you want or you can skip some payments. The consequence is that your policy might lapse if enough premiums aren’t received or if your cash value account doesn’t grow.

Variable Life: This type of policy has more risk because you have the option of investing your premium payments. If your investments grow, then the cash value in your policy will also grown. On the other end, if your investment choices are poor, then your policy can lapse.

If you are considering a cash value life insurance policy, then it is a good idea to speak with an agent about your situation first to help you decide if its the right type of coverage for your family. Most people can obtain adequate coverage with a term life policy, but there are also many ways that a cash value policy can fill in some gaps.

It is best to compare multiple life insurance quotes to determine which type is most affordable for you. There is coverage available for children all the way up to age 85 life insurance.