Should One Get Life Insurance With Cash Value?

iQuanti: Permanent life insurance policies are known best for offering lifetime coverage, but they also have another important component: the cash value. Cash value lets you save some of each premium you pay to build cash value that grows, offering you another asset down the line. Let's dive deeper into what cash value is and the benefits of getting life insurance with cash value.

What is cash value?

Cash value is a component of permanent life insurance policies. Part of each premium you pay goes into the policy's death benefit and the rest goes toward the cash value, which grows tax-deferred. Some types of permanent policies, like whole life insurance, grow your cash value at a fixed rate. Others, like universal life insurance, let you invest your cash value in the market for more potential growth.

Once your cash value grows enough, you can withdraw from it, borrow against it, and pay premiums with it. You can even surrender your whole life policy and receive the cash value minus surrender charges.

If you're deciding between term and whole life insurance, keep in mind that term life policies don't offer a cash value component. With term life insurance, your premium payments only go toward the death benefit.

Benefits of life insurance with cash value

Life insurance with cash value offers plenty of benefits, including:

You can build wealth tax-deferred

Your cash value grows over time, helping you build wealth alongside other savings and investments. Also, any money that goes into your cash value is tax-deferred, meaning you don't pay taxes on it while it grows in the account. You may only owe taxes on withdrawals or surrenders to the extent they exceed your basis. This makes cash value life insurance a potential option for people who have maxed out other accounts and are looking for additional tax-advantaged growth options.

You can get low-interest loans with no credit check

Once you build up enough cash value, you can take out loans from it with no credit check and a low interest rate that adds on to your loan balance. There are no monthly payments, meaning you can pay back the loan whenever you want. But keep in mind that your loan can't grow larger than your remaining cash value, or your policy may lapse.

You can pay premiums with cash value

Many permanent life insurance policies let you cover some or all of your premiums with your cash value when it's large enough. That means you may be able to keep your lifetime coverage without making monthly payments.

The bottom line

Permanent life insurance may have higher premiums than term life insurance, but the cash value often makes that extra cost well worth it. You can build another source of tax-deferred wealth and draw on it whenever you need to. Plus, you can use that cash value to cover your premiums, potentially gaining you full coverage without having to pay each month.

All that said, there are many types of life insurance policies with cash value available. Do your research and understand the details of each before deciding on a policy so you can get the right coverage for your needs.