Introduction
Life insurance conjures up a feeling of security and peace of mind that typically gets associated with it as a means of safety net to family members in case of an untimely death. Few would, however know life insurance comes in different forms, some of which work as great financial tools, too. Cash value life insurance policies have two concurrent benefits: they provide assured sum in case of death and allow collecting cash value over the years. This blog explores how life insurance can be a financial asset by exploring cash value policies, mainly whole and universal life insurance.
Understanding Cash Value Life Insurance
Cash value life insurance contracts are supposed to provide a death benefit but, simultaneously, have some form of cash accumulation. In this respect, it is different from term life that only pays out at the moment of death. In this regard, for cash value insurance contracts, it accumulates a savings component. This cash build up takes time, and he is allowed to draw from it at the discretion of the policyholder during his lifetime, making it some form of flexible financial use.
The cash value accumulates tax-deferred; that is to say, the policyholders do not pay taxes on the growth until withdrawal or surrender of the policy. This makes the cash value policy an attractive means to increase the financial portfolios of individuals.
Types of Cash Value Policies
In summary, there are basically two types of cash value life insurance: whole and universal. Understanding the nuances of each will allow you to make an informed decision in regards to which may be best for your financial goals.
Whole Life Insurance
The whole life insurance covers the entire life of the policyholder provided the premium payments are paid. Typically, the premium is level, and the death benefit is guaranteed. The cash value does grow steadily, although the growth rate typically offered is set by the insurance company. Whole life policies may also pay dividends that further help enhance the cash value.
Also, whole life is predictable. One will be able to project into the future both premium and cash value growth.
Universal Life Insurance
Universal life insurance has more flexibility than whole life. Premiums and death benefits can be modified within certain limits, so that in terms of changes in one’s financial situation, a better opportunity is presented to the customers to adjust accordingly. All its cash values earn interest at a crediting rate, which can change over time.
This may help the policyholders who face change in their financial condition over time. For instance, while they earn more, a policyholder can choose to put extra into their universal life policy, which increases the cash value.
Working with Cash Value
Here, various working of cash value can be done to use it in multiple aspects of the financial system. Here are some strategies one may consider:
- Loans on the Cash Value
Policyholders can withdraw cash against the cash value of a life insurance policy. Loans are usually offered at rather low interest rates compared to a traditional loan. The money can be used in paying education, buying a home, or starting up a business. It must be remembered that outstanding loans will diminish the value of the death benefit when it is paid out if not repaid beforehand.
- Withdrawals
Cash value in the policy can be taken for cash withdrawal, but this affects the death benefit. This means liquidity is always available at times such as when a sudden medical bill arises or through other changes in life.
- Retirement Supplement
Cash value life insurance will also serve as an additional retirement income for beneficiaries. The cash value can be accessible to the recipient to meet living and health-related expenses or traveling around. The source of withdrawal, up to the amount of premium paid, is tax-free; therefore, it may be an effective technique applied by the beneficiary during retirement for the access of funds.
Tax Benefits
Perhaps the most convincing reason to think of cash value life insurance is based on tax benefits. When the cash value grows, that happens in a tax-deferred manner, so the more money could grow over time, the better. And when the death comes, the beneficiaries will receive the death benefit, usually paid free of income taxes. Such a combination can help an estate planner pass the wealth with minimal impact from taxes.
Conclusion
It is a bit more than just a safety net for loved ones; instead, cash value life insurance policies can be a very vital financial asset that promotes growth, flexibility, and liquidity. This knowledge of various cash value policies, along with their features, equips an individual to make the appropriate decisions in furthering his or her financial goals. Whether you prefer to select whole life because of stability or universal life for flexibility, adding a cash value policy to your financial planning can help you open the door to a much more secure future. Investing in life insurance has always been something more than just securing the death benefit; nowadays, it also becomes a multifaceted financial tool that will give you peace of mind, thus, financial growth throughout your lifetime.
