Cash Value Life Insurance

In an unpredictable world, securing your financial future is more important than ever. But what if life insurance could offer more than just a safety net for your loved ones? Imagine a policy that not only provides a death benefit but also helps you build wealth, access funds when you need them, and support your financial goals throughout your lifetime. That’s exactly what cash value life insurance can do.

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Unlike traditional term life insurance, which only provides a payout after you pass, cash value life insurance offers a built-in savings component that grows over time. Let’s take a look at how it works and why it might be a smart addition to your financial strategy.

What is Cash Value Life Insurance?

Cash value life insurance is a form of permanent life insurance that provides lifelong coverage and includes an investment component known as the policy’s “cash value.” It builds equity, making the policy useful not just for the death benefit paid out to beneficiaries but also as a financial tool for the policyholder during their lifetime. 

The policy consists of two core components: the death benefit and the cash value. 

The death benefit is the amount that’s paid to your beneficiaries when you pass away, while the cash value is a separate account within the policy that grows over time. You can think of the cash value as a type of savings or investment account that’s funded by a portion of each premium payment you make. This cash value grows tax-deferred, meaning you won’t pay taxes on its growth until you start making withdrawals.

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How Does Cash Value Life Insurance Work?

When you purchase a cash value life insurance policy, your premium payments are split into three parts:

• Cost of insurance: This covers the actual life insurance component and provides the death benefit to your beneficiaries. 
• Policy fees and charges: These are administrative costs associated with maintaining the policy, including sales charges and other expenses.
• Cash value contribution: The remaining portion of your premium buys paid up insurance (in whole life insurance) which translates to equity or cash value in the policy. Or goes directly into the cash account (for universal life insurance).

The exact breakdown of your premium and how quickly the cash value grows will depend on the specific type of policy you purchase. With whole life insurance, for example, the premium remains the same for the life of the policy, and the cash value account grows at a guaranteed rate set by the insurance company. 

Universal life policies, on the other hand, allowing you to adjust premiums and death benefit amounts, with cash value growth tied to a market index or other benchmark.

Types of Cash Value Life Insurance Policies

There are several types of cash value life insurance policies to choose from, each with its own unique features and benefits:

Whole Life Insurance

Also known as “ordinary life” or “straight life,” whole life is the most common type of cash value life insurance. It provides a fixed death benefit, guaranteed cash value growth, and consistent premiums for the life of the policy. The cash value grows at a rate determined by the insurer and can be accessed through policy loans or withdrawals.

Universal Life Insurance (UL)

Universal life insurance allows policyholders to adjust their premiums and death benefit over time (within certain limits). The cash value component typically earns interest based on current market rates.

Indexed Universal Life Insurance (IUL) 

With indexed universal life insurance, the cash value growth is tied to the performance of a market index, such as the S&P 500. While there is more growth potential than a traditional universal life policy, there’s also more risk involved, as the cash value can fluctuate with market conditions. Many IUL policies offer a guaranteed minimum interest rate to protect against market downturns. They also have a cap which can significantly limit earnings in market up years.

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Variable Life and Variable Universal Life Insurance (VUL)

Variable life and variable universal life insurance policies offer the most investment flexibility and potential for growth, but also come with the highest level of risk. With these policies, you can allocate your cash value among a selection of investment options, such as mutual funds. If the investments perform well, your cash value can grow significantly. However, poor performance can lead to losses, which greatly impacts the death benefit and policy’s sustainability.

Pros and Cons of Cash Value Life Insurance

Cash value life insurance policies offer several advantages but also come with some drawbacks to consider.

Advantages:

• Lifelong coverage: As long as you pay your premiums, your beneficiaries will receive the death benefit no matter when you pass away.
• Tax-deferred cash value growth: The cash value component grows tax-deferred, meaning you won’t pay taxes on its growth until you start making withdrawals or surrendering the policy. 
• Access to cash value: You can borrow against the policy’s cash value or make withdrawals to supplement retirement income, cover emergencies, or fund other financial goals.
• Potential to increase death benefit: Some policies allow you to use the cash value to purchase additional death benefit coverage without new underwriting.

Disadvantages:

• Higher premiums: Cash value life insurance policies typically have higher premiums compared to term life insurance due to the cash value component.
• Slow cash value growth: It takes time to build up a substantial cash value..
• Fees and charges: Policy fees, investment management charges, and surrender charges can eat into your cash value growth.
• Investment risk: Policies like variable life and indexed universal life come with investment risk, meaning your cash value can fluctuate or even decline based on market conditions.

Accessing Your Policy’s Cash Value

One of the key benefits of cash value life insurance is the ability to access the life insurance cash value while you’re still alive. There are a few ways to do this:

• Withdrawals: You can withdraw money from your policy’s cash value, but keep in mind that this will reduce your death benefit. Withdrawals up to your policy basis (the amount you’ve paid in premiums) are typically tax-free.
• Policy loans: You can borrow against your policy’s cash value, usually at a lower interest rate than a traditional loan. If you don’t repay the loan (plus interest), it will be deducted from the death benefit when you pass away.
• Surrendering the policy: If you no longer need life insurance coverage, you can surrender your policy and receive the cash surrender value (cash value minus any fees and outstanding loans). Keep in mind this will terminate your life insurance coverage.

It’s essential to understand the potential tax implications and impacts on your death benefit before accessing your policy’s cash value. Consult with an insurance professional to explore your options.

Is Cash Value Life Insurance Right For You?

Cash value life insurance can be a valuable tool for those seeking lifelong coverage and a way to build tax-deferred savings over time. However, it’s not the right choice for everyone. 

Leveraging Cash Value Life Insurance for Your Financial Future

Cash value life insurance is a unique financial product that combines lifelong coverage with an investment component, offering policyholders both a death benefit and a living benefit. By understanding how cash value life insurance works, the different types available, and the pros and cons, you can make an informed decision about whether it’s the right choice for your financial needs and goals.

While cash value life insurance isn’t the best fit for everyone, it can be a valuable tool for those seeking to protect their loved ones, build tax-deferred savings, and access funds for retirement or other financial milestones. 

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As with any significant financial decision, it’s essential to consult with a trusted advisor who can help you navigate your options and create a comprehensive plan tailored to your unique situation. With McFie Insurance Experts by your side, we can customize the perfect life insurance policy for you. 

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by Jesse McFie

I have worked hard and saved from an early age. In 2018, my brother and I started our own welding and fabrication business and grew it to a full-time company. As taxes, fees and inflation ate away at my hard-earned income and savings, I quickly realized that the financial system in America is not designed to help you get ahead. Using participating whole life insurance and the principles we teach at McFie Insurance has helped me get ahead financially. I’ve used my life insurance policies to expand our business, debt free, to purchase equipment, and save for a piece of property. I love sharing with others how they can do the same.