What is cash value life insurance?
If you’re confused by all the life insurance policies and different terminology out there then you’re not alone. A policy’s cash surrender value is also often a huge source of confusion. It doesn’t have to be though and you can make life insurance work for you and your needs.
Cash Value Life versus Term Life Insurance
The first thing to note is that a cash value life insurance is also known as a permanent life insurance. This is different from having a term life insurance as detailed below:
- More expensive
- No expiry
- Provides borrowing opportunities
Essentially, a term life insurance is simpler and therefore costs less. With term life insurance, you are covered if you die within a specific period of time. If you die after the time period ends then no one gets your death benefit. On the flip side, permanent life insurance is more complex and covers you for your entire life. The higher premiums come from what’s known as the cash value.
When you pay your premiums for permanent insurance, some of that money goes to pay the overall costs of your policy. The remaining amount gets put into a pot that builds over time and generates interest. It’s a huge advantage because you can access the cash value for your benefit whilst being alive in the form of a loan or a type of dividend.
As mentioned, permanent life insurance has no expiry date. It’s also worth noting that the risk to the insurer decreases as your cash value increases because this money helps offset your policy’s liability. Although it’s that money that also determines the value of life insurance you hold and therefore how much you can borrow from it, as explained below.
Provides borrowing opportunities
Many people don’t realize that a permanent life insurance policy can be equally valuable during their lifetime as it is after death. That’s because you can make a withdrawal or take out a loan against the cash value. You can even use the cash value to help you with the premium payments.
Different Types of Life insurance
A cash value life insurance, or permanent life insurance, is the overall term for the following different types of life insurance policies:
- Whole life insurance
- Universal life insurance
- Variable and indexed
Whole Life Insurance
This is the most common life insurance policy that covers you for your whole life and demands on-time premium payments. You get a guaranteed cash value pot with it although the premiums are high. That’s because you need to cover your fixed death benefits and the cash value requirements.
Universal Life Insurance
The main difference, when compared to a whole life insurance policy, is that a universal life insurance policy has more flexibility. During your policy, you can adjust your death benefit as you wish and you can also pay your premiums whenever you want and in whatever amount. Of course, this then impacts your overall death benefit but the flexibility can be a huge advantage for people.
Variable and indexed Universal Life insurance Policies
The terms variable and indexed refer to how your cash value within your life insurance policy grows. So, for indexed, your cash value earns interest based on an equity index. On the flip side, variable universal life insurance policies have a sub cash value that’s invested in the stock markets with certain criteria. Overall, it’s a bit like having a mutual fund. Whichever approach you choose will depend on your current financial situation and general risk appetite.
Why Cash Surrender Value is Important
Another important term to understand is the cash surrender value of your life insurance policy. Simply put, this is the monetary amount you would be given by your insurer if you willingly terminate your life insurance policy. There are many reasons why people might decide they no longer need their policy. Nevertheless, you should consider the following options before you cancel your policy because you might be able to generate more money than simply getting the surrender value of life insurance:
- Maximize on your cash savings
- Pay your premiums
- Life Settlement
Maximize on your cash savings
The best part of having a cash value is that you can take money out of it. Of course, you still have to pay your premiums so you’ll need to calculate if this is worth it for you. Another option is to access the cash value through a loan. You’l have to review the requirements with your life insurance company but again, this might give you the extra cash you need whilst still keeping the death benefit.
Pay your Premiums
If you’re struggling with the premium payments, then you might consider talking to your life insurance company. They might be able to use your current cash value to cover your premiums so giving you the break you need.
Life situations change and you might now find yourself not needing a life insurance policy anymore. If that’s the case, then terminating it is the most obvious approach. Nevertheless, there are life settlement companies who are more than willing to buy it off you. The great news is that you’ll most likely get a sum greater than your cash surrender value. That’s because your buyer is paying to get your death benefit whereas when you cancel your policy, no one gets the death benefit. Therefore, why not try to sell your policy and get more money for it?
Final Recommendations for Maximizing your Cash Surrender Value
Naturally, getting the right life insurance policy is a fine balance of needs. You’ll have to work out what type of premiums you can deal with to get what you want from it. If you can afford it, then a whole or universal life insurance policy covers you the most. From there, you get a very healthy cash value to tap into. Furthermore, if your situation changes, you can easily sell it to a life settlement company and get a value that’s more than your cash surrender value.