When many people think of life insurance, they think of the death benefits (i.e. the money the policy pays to the beneficiaries at the time of the policyholder’s death). However, cash-value life insurance offers more than just a death benefit: as the name implies, it allows the policyholder to grow the wealth in their account over their lifetime. Cash-value life insurance can be used as a tax-sheltered investment and can even be tapped into for retirement income—with some stipulations.
Before exploring the financial benefits of cash-value life insurance, it’s important to understand the different policy types:
- Whole Life Insurance—This is the most straightforward type of cash-value life insurance. With whole life insurance, the death benefit is guaranteed, your premium will remain constant, and the cash value will grow at a guaranteed rate.
- Indexed Universal Life Insurance—The cash value growth in this type of policy is tied to a stock index, such as the S&P 500. These indexes typically have a cap or participation rate, so it’s important to study the policy and talk to your financial advisor about the pros and cons.
- Variable Universal Life Insurance—The cash value of this type of policy will be invested in stocks, bonds, and mutual funds. Variable universal policies offer the greatest potential return, but they also come with a higher risk of losing the cash value.
How Can You Use the Cash Value of Your Life Insurance?
Any type of cash-value life insurance will give you greater flexibility than term life insurance. If you have a term life insurance policy, you can’t borrow against it or cash it in (since it only offers a death benefit). Cash-value policies provide multiple routes to use the money you grow in your account. Here are a few ways you can capture the cash value of your insurance policy:
- Withdraw cash tax-free. Many cash-value policies allow you to withdraw money without being taxed for it, as long as your withdrawals don’t exceed the total amount of premiums deposited into the policy. However, these withdrawals may drain the policy’s death benefit.
- Improve eligibility for financial aid. The cash value of a permanent life insurance policy is not an asset that you have to report on college financial aid forms (the FAFSA).
- Borrow against the cash value of the policy. If you take out a loan against your life insurance policy, you’ll have to repay it with interest to maintain the policy’s death benefit.
- Pay your insurance premiums. Once the cash value in your account reaches a certain level, you can use it to cover the cost of your insurance premiums.
- Get a tax-free advance of the death benefit. Some policies will allow you to access a portion of the death benefit to cover long-term medical expenses. You’ll need to check the details of your policy to determine if this option is available to you.
- Transfer cash value to the death benefit. Some policies will let you trade the cash value in your account for a larger death benefit.
It’s important that you capture the cash value of your permanent life insurance. If a policyholder hasn’t used the cash value by the time of their death, the remaining cash will go back to the insurance company, and beneficiaries will receive the death benefit only.
Should You Choose Cash-Value Life Insurance?
Cash-value life insurance comes with higher premiums than term life insurance and may not be the right choice for everyone. Financial advisors often recommend cash-value life insurance policies for people who:
- Are already making the maximum contributions to their tax-advantaged retirement accounts and are looking for another way to grow their nest egg
- Have built up an adequate emergency fund
- Can commit to a long-term policy
Since cash-value policies can be much more difficult to untangle than term policies, it’s best to work with an experienced life insurance advisor to select the right policy for you and your family.
Call Americans for Life at (860) 426-2022 or fill out our online contact form to learn more about maximizing the financial benefits of your life insurance