Do You Need a Cash-Value Insurance Policy?

Life insurance helps you provide for loved ones after your death. But policies also may include a variety of options. Cash-value policies, for example, offer some interesting features.

Life insurance policies with cash value include a withdrawal feature along with a death benefit. Essentially, they accumulate funds that you can tap at certain times, either through withdrawals or loans.

You can even use the cash value to pay your policy premiums. Any money you withdraw simply reduces the amount of the benefit on your death.

The benefit of purchasing a cash-value life insurance policy is the peace of mind that comes from knowing you have an option if you need cash. The downside is that it typically costs more than traditional life insurance because your premium pays for both the death benefit and the cash value.

Whether or not a cash-value life insurance policy is right for you depends primarily on what you need from it. If you only require life insurance for your survivors, it may not be the answer for you.

On the other hand, if the unique features appeal to you, you may want to consider it. These features include the ability to borrow from it when necessary; plus, it offers a way to pay your premiums in retirement when cash on hand is scarcer.

You can also pass the cash value on to your survivors. And the cash value in the policy is somewhat tax-sheltered – the interest may not be taxable.

Cash-value policies are complicated, so before you buy one, be sure you understand what they can – and cannot – do. For example, cash-value life insurance policies should not be used as savings vehicles, because you’re taxed on the money you contribute (although, as noted, the interest is generally tax-free, as is the death benefit).

Your advisor can explain the options and details to help you decide if this type of policy is right for you.