Cash Value – How it adds to your life insurance benefits
There’s a never-ending difference of opinion about whether to opt for a permanent life insurance or to go with term life coverage. Those who intend to buy their life insurance policies often come up with the same question in insurance forums. Well, both the options have their set of benefits and flaws. However, one reason which can make you choose permanent life insurance over a term policy is that, it promises a cash value return.
What is cash value?
Cash value is nothing but a portion of your premium that accumulates with time. When you buy a permanent life insurance policy, you’ll apparently have to pay the regular premiums on it. A pre-determined part of the premium amount is forwarded towards a cash value account, whereby it gets deposited regularly. Over time, the cash value grows and so does the worth of the policy.
Why to opt for a permanent life insurance?
A term life insurance policy doesn’t promise a cash value return. It only provides life insurance coverage for the pre-determined time period. If the insured person doesn’t expire within the ‘term’, no one gets hold of the death benefit. If the policy holder decides to surrender or cancel coverage before the so-called ‘term’, he gets nothing in return. Thereby, all the premiums, which had been paid for the policy, are lost.
A permanent life insurance policy comes in the form of whole life, universal life or variable universal life insurance. Along with the lifetime coverage, these forms of life insurance policies offer the benefit of cash value accumulation. The policyholder can loan against the cash value of the policy, at considerable low interest rates. Again, if the policy is surrendered or cancelled before the date of maturity, the insured person is entitled to receive the accumulated cash value from the policy.
How important is the cash value built-up for an insured?
The cash value that comes along with a permanent life insurance offers flexible alternatives to the insured, as mentioned below:
- The accumulated cash value amount grows with interest, and is tax-deferred.
- The insured can convert the existing permanent life insurance policy, into a ‘paid-up’ policy, whereby the premiums are paid from the cash value itself. However, this can only be done after a considerable amount is built up as cash value against the policy.
- The policyholder can take out a loan against the cash value of the policy at an affordable interest rate for a set number of years. If the loan is not paid back before the insured passes away, the outstanding loan amount with interest will be deducted from the death benefit, which the beneficiary is supposed to receive.
- The policyholder can also make a full or partial withdrawal from the accumulated cash value of his/her life insurance policy. The guaranteed death benefit from the policy gets reduced accordingly.
- You can choose to surrender or cancel your life insurance policy. Though you’ll not be entitled to receive the death benefits, you’ll at least be able to collect the cash value from the policy. However, surrender charges and tax will be deducted from the amount.
The final decision to opt for a permanent life insurance or a term life insurance depends on you. Before going out into the market to purchase a life insurance policy, you must gather a comprehensive knowledge about how each form of coverage works. You can even visit the online insurance forums and seek expert advice.
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