Understanding Cash Value Life Insurance

Cash-value life insurance policies offer a withdrawal feature along with a death benefit, but they can get complicated, so you have to know what you need it for before you buy one.

Peace of mind

How does it work? Cash-value life insurance policies accumulate funds that you can tap at certain times through withdrawals or loans. Then later, when enough cash value has been built up, you can also use it to pay your premiums. Any money you withdraw simply reduces your death benefit.

Cash-value life insurance achieves a number of things, including the peace of mind that comes from knowing you have an option if you need cash.

However, there are some things to consider when investing in such a policy:

Know what you want

The biggest consideration is what it is you actually want the policy for. If all you need is life insurance – and not the unique features of a cash-value policy – it’s probably not a good idea to buy it, as cash-value life insurance policies are usually considerably more expensive.

Additionally, it’s important to understand that cash-value life insurance policies should not be used as savings vehicles, because you are taxed on the money you contribute (although the death benefit is generally tax-free to survivors).

Finally, keep in mind that the cash value doesn’t start to accumulate immediately, because commissions are often subtracted in the early years (and there are often annual fees as well).

Although there are these downsides, a cash-value life insurance policy may be just exactly what you need.

However, it’s important to discuss this kind of a policy with your advisor. An insurance professional can answer any questions you may have, show you all the options available, and help you decide whether cash-value life insurance is suitable for you based on your goals and risk tolerance.