Many people know life insurance provides a policyholder's loved ones with significant financial protection when the policyholder passes away. In addition, some life insurance policies come with a growth component called cash value, which grows tax- deferred. This article will discuss life insurance with cash value in more detail and dive into scenarios where it could make sense for you.
What is life insurance with cash value?
Life insurance with cash value is a type of life insurance that accrues wealth in a cash value growth component. Part of each premium you pay goes into this cash value component, which then grows tax-deferred at a certain rate. The exact growth rate depends on the type of cash value life insurance policy you get:
- Whole life insurance: Cash value grows at a fixed, guaranteed rate.
- Final expense insurance: Cash value growth at a fixed, guaranteed interest rate.
- Universal life insurance: Cash value grows at a variable
- Variable life insurance: Cash value is invested in the policyholder's choice of assets, such as stocks, bonds, and mutual funds. This policy offers the most growth potential, but the policyholder is not shielded from market losses.
In some cases, you can pay part or all your life insurance premiums with cash value when it grows large enough. However, keep in mind that the policy may lapse if your cash value reaches 0.
How to determine if cash value life insurance is worth it
Cash value life insurance can cost more, but this can be worth it in several scenarios:
1. You want to build wealth over time
The cash value component offers you a vehicle to build wealth over time. Once it grows large enough, you can borrow from it at a low rate with no credit check or due date, or you can withdraw from it. This can be especially helpful if you've maxed out your contributions to other tax-advantaged accounts, like your 401k or IRAs, since the cash value grows tax-deferred.
2. You have a larger budget for premiums
If you have a larger budget for life insurance, a cash value life insurance policy may be worth paying for. Aside from the benefits of cash value, these types of policies offer permanent coverage. That means you're covered for life if you keep up on your premiums.
3. You want to boost the death benefit payout
A life insurance policy with cash value can help boost the death benefit for your beneficiaries. The cash value can be used to increase the policy's face value, which will in turn increase the death benefit payout. This can allow you to pass along more money to your heirs so they have the funds they need to cover expenses and accomplish financial goals in your absence.
Should I get life insurance with cash value?
Cash value life insurance costs more, but the cash value component's benefits make that cost worth it for many. Primarily, it offers you another vehicle for building tax-deferred wealth. This lets you borrow or withdraw from it down the road for anything from covering emergencies to paying tuition for children or grandchildren.
It may also allow you to boost your death benefit payout to pass down a larger amount of money to your heirs. . Ultimately, you must weigh your needs against the higher premiums to decide if a life insurance policy with cash value is right for you. If you decide you need it, get quotes from several insurers to get the best possible rate.
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