Life Insurance Cash Value

Life insurance policies fall into one of two categories: term life or permanent life. Term life is straight insurance coverage. You are covered for specified period of time. If you die during that time, your beneficiaries receive the face value amount of your policy. If you outlive the term, there is no benefit paid. Permanent life, which has a number of variations, covers you for the remainder of your life plus it provides a cash value component. A portion of your premiums for your policy goes into a cash value account that grows tax-deferred over time.

With cash value life insurance products, once the cash value portion of the account has grown enough and you are considered “paid up”, you can choose to use funds from your cash value to cover the premiums on your policy. You also have the option to make withdrawals from your cash value, but withdrawals can decrease the death benefit for your policy. Just how much your death benefit would be decreased varies per policy, but it can be as much as a dollar for dollar reduction. In other words, if you have a policy with a $100,000 death benefit and a $25,000 cash value and you elect to withdraw $10,000 from the cash value, your death benefit would then be reduced by $10,000 to $90,000.

Something else to keep in mind is that regardless of how much you have accumulated in the cash value portion of your account, your beneficiaries will only receive the death benefit amount if you die. So if your policy has a $100,000 death benefit and your cash value component has grown to $150,000, your beneficiaries would only receive the $100,000 death benefit upon your death.

Within financial circles there is debate over the merits of term life insurance versus permanent life products that contain cash value components. Some financial experts say that the forced investment component of cash value policies will be most beneficial in the long run, while others advise buying the much cheaper term coverage and investing the balance elsewhere. All would seem to agree, though, that policies with cash value are designed for the long haul. Depending on the policy, it can take between 10-15 years before a cash value plan would begin to pay off.

If you need a fixed amount of coverage for a limited amount of time, you may be better suited for term life insurance coverage. If, on the other hand, you are looking to build cash value over a long period of time while also providing a guaranteed death benefit for your family, you may want to investigate permanent life policies with a cash value component.