iQuanti: Many people know that life insurance provides an insured’s loved ones with significant financial protection in the event of the insured’s death. Additionally, some life insurance policies have a growth component called cash value, which grows tax-deferred. This article will discuss life insurance with cash value in more detail and dive into scenarios where it might make sense to you.
What is cash value life insurance?
Cash value life insurance is a type of life insurance that builds wealth in a cash value growth component. A portion of every premium you pay goes towards this cash value component, which then grows tax-deferred at a certain rate. The exact growth rate depends on the type of cash value life insurance policy you purchase:
- Whole life insurance: Cash value grows at a fixed, guaranteed rate.
- End-of-stay expense insurance: Cash value growth at a fixed, guaranteed interest rate.
- Universal life insurance: The cash value grows at a variable rate.
- Variable life insurance: Cash value is invested in the policyholder’s choice of assets, such as stocks, bonds and mutual funds. This policy offers the greatest potential for growth, but the insured is not immune to market losses.
In some cases, you can pay some or all of your life insurance premiums with cash value when it becomes large enough. However, keep in mind that the policy may expire if your cash value reaches 0.
How to determine if cash value life insurance is worth it
Life insurance with cash value can cost more, but it can be worth it in several scenarios:
1. You want to build wealth over time
The cash value component gives you a vehicle to build wealth over time. Once it gets big enough, you can borrow at a low rate with no credit check or due date, or you can opt out. This can be especially helpful if you’ve maximized your contributions to other tax-efficient accounts, like your 401k or IRAs, since the cash value increases tax-deferred.
2. You have a larger bounty budget
If you have a bigger budget for life insurance, a cash value life insurance policy may be worth paying for. In addition to cash value benefits, these types of policies offer permanent coverage. This means that you are covered for life if you continue to pay your premiums.
3. You want to increase the death benefit payment
A cash value life insurance policy can help increase the death benefit of your beneficiaries. The cash value can be used to increase the face value of the policy, which will in turn increase the death benefit payout. This can allow you to pass on more money to your heirs so that they have the funds to cover their expenses and achieve their financial goals in your absence.
Do I need life insurance with cash value?
Cash value life insurance costs more, but the benefits of the cash value component make the cost worth it for many. Primarily, it gives you another vehicle to build tax-deferred wealth. This allows you to borrow it or withdraw it for everything from covering emergencies to paying school fees for children or grandchildren.
It may also allow you to increase your death benefit payment to pass on more money to your heirs. Ultimately, you need to weigh your needs against the higher premiums to decide if a cash value life insurance policy is right for you. If you decide you need it, get quotes from multiple insurers to get the best rate possible.
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