All life insurance policies pay a death benefit, but certain policies, known as “cash value” or whole life insurance policies, so more than that. These policies accumulate a cash value over time, which you can withdraw or borrow from after a certain period of time.
Compared to term life insurance policies – pure insurance policies that offer a death benefit but no cash value – cash value policies are higher in terms of premium. The premium difference is invested in a way that earns interest for you, tax free. And while term policies provide death benefits over a pre-determined period of time (for example, 5 years, or 10 years), cash value policies are generally lifetime policies which, as long as they remain in force, will pay a death benefit regardless of when the insured dies.
There are different kinds of cash value life insurance policies, so you’ll want to know the specifics of how your policy works in detail. But generally, you pay your premiums, and a part of the premium goes into a cash value account. Once a certain account level has been reached, you have a number of options:
– You can stop paying premiums, and use the money in the cash value account to pay the premiums for you. Depending on how much money is in your account, the principal may stay the same, with the interest going towards your premium payments.
– You can continue paying your premiums, maximizing the growth of your cash value account. Your life insurance policy then becomes more than just life insurance. It becomes an additional retirement savings or college savings account that you can draw on in later years.
– You can take a loan from your cash value account. You become like your own bank, lending money to yourself that will not be taxed and you don’t ever have to pay back. If you don’t pay the loan back, the loan amount is simply deducted from your death benefit when you die.
The higher insurance premiums associated with cash value accounts have led many insurance agents to recommend a course of “buying term insurance and investing the difference.” While this makes sense in theory, it’s a lot like being on a very strict diet. It’s very easy to get off track and the end up financially somewhere other than where you really planned to be.
While cash value policies are more out of pocket expensive, their premiums are set for the life of the policy. Comparable term life policies may begin with very low premiums, but when the policy expires, renewing the coverage could be far beyond what you’re able to pay. And regardless of when your death occurs, you know that with a cash value policy, your loved ones will receive the death benefit. With term life insurance, if you die outside the policies coverage period, there’s no benefit for your survivors.
Choosing the right type and amount of life insurance coverage is critical in your personal and family financial planning. At BeamaLife, we’ve created our own technology, and partnered with 100 of the top insurance companies. We’ll find the best life insurance rates and life insurance quotes that make the most sense for your financial goals and needs, and we’ll get you the coverage you want at the price you want to pay!
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