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Cash Value Life Insurance

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Cash Value Life Insurance

Many Canadians are unsure if they should purchase cash value life insurance because they don’t understand how it works. When we talk about life insurance, they’re two types: term life insurance and permanent life insurance. 

Cash value life insurance is a policy that covers the life of a policyholder. It is permanent life insurance with a cash value element accumulating savings with time.

Whole, universal, and variable life insurance are some of the types of this policy. You can use the cash value for different purposes that you deem fit.

We’ve compiled this article to help open your mind about this policy. At the end of this article, you’ll learn all that is there to cash value life insurance, which will help you to make better decisions.

What is Cash Value Life Insurance?

Cash value life insurance is any permanent life insurance that allows you to amass cash value on your insurance policy. Your premium payment provides for transferring a part to the death benefit. They invest the rest in a tax-deferred account that grows with time, known as the cash value.

A policyholder can use the cash value in different ways, like lending it against its balance. You could also withdraw the cash value to pay for premiums or terminate the policy to receive the cash. 

The cash value of each policy is different. However, you can surrender, withdraw, or loan to get your cash value.

How Does Cash Value Life Insurance Work?

Cash value life insurance Canada offers death benefits and savings accounts. They transfer money to the cost of insurance and the savings account after making premium payments. Another name for this savings account is “cash value.”

This cash value grows and earns interest when you continuously make premium payments. This interest can either be fixed or variable. It is fixed when the insurance company approves and variable when bound by the stock market’s performance.

Your policy’s cash value can be used for different things, including paying for premiums, taking a loan, and surrendering and cancelling the policy for its cash value. The cash value can also be used to cancel premium payments, which is its prominent feature. You can use the increase in the cash value to pay for the policy’s premium.

Upon the policyholder’s death, the beneficiaries take up the death benefits. If there’s any outstanding loan, it’ll be subtracted from the death benefit.

Pros of Cash Value Life Insurance

As with every other insurance, there are several advantages associated with it. Let’s look at some of them.

Covers Your Entire Life

Cash values are usually permanent. Therefore, you don’t need to worry about them expiring. Remember not to surrender your policy, and you’re good to go.

Your Beneficiary Gets the Death Benefits

Once you make your premium payments, your policy will be effective until your death. If you withdraw or take a loan from your policy, keep the cash value at a certain minimum; otherwise, your policy might expire. Consider life insurance cash value if you want to leave something behind for your loved ones.

Riders for Additional Protection

Most policies allow for adding policy riders, which adds more coverage and benefits. Most people opt to include the accelerated death benefit rider in their policy. If you have a terminal illness, you can access your death benefit while still alive. This helps cover unforeseen expenses.

cash value life insurance

Cons of Cash Value Life Insurance

The following are the downsides of this type of insurance.

The Policy is Expensive

Cash value life insurance is more expensive compared to term plans. If you want your coverage to last only for a specific period, term life is your best bet. In addition, it won’t cost much, unlike some other policies. Although it can be attractive, it’s better not to consider it if you don’t urgently need an insurance policy.

Beneficiaries Do Not Receive Cash Value

Upon the death of a policyholder, the cash value returns to the insurance company; beneficiaries only get the death benefit. Although some policies offer death benefits and cash value, you must pay more.

Cash Value Accumulates Slowly

Some policies take forever to gather their cash value. Chances are you’ll wait years before you can have a sizable cash value buildup. You can consider talking to an insurance expert to direct you further.

Types of Cash Value

Once you keep making premium payments, your permanent policies can last your whole life, and many have cash value. Manulife, Empire Life, and FaithLife Financial are some companies that provide cash value life insurance. The following are the insurance policies that have cash value.

Whole Life Insurance

This is a common permanent policy in which the cash value grows at your insurer’s fixed rate. FaithLife Financial provides whole life insurance in Canada, where you can receive dividends on your policy. The life insurance cash value account generally has a lower interest rate than separate investing.

During the entire period of this policy, you’ll be paying a particular premium amount. A part of this goes into the savings account and accrues cash value as time passes. You can also loan or surrender the policy for its cash value as a policyholder.

Variable Life Insurance

Although similar to whole life insurance, you can invest the cash value in different fund accounts rather than leaving it to grow at a fixed interest rate. This way, you earn more interest as the cash value grows, but note that you’re prone to more investment risks.

Universal Life Insurance

This permanent life insurance allows flexibility, as you can constantly adjust your death benefit and premium. You can increase or reduce your premium payment and use the cash value to pay for it. They add a portion of your premium to your savings account, where its cash value grows with time.

Variable Universal Insurance

This policy’s cash value growth depends on how the funds you choose perform. Investment risk is higher in this policy than in other cash value life insurance.

Indexed Universal Life Insurance

While VUL’s cash value grows based on the performance of funds, the growth of the indexed universal life insurance policy depends on the market index. As the policyholder, you’ll be allowed to pick from select offerings by the insurance company. Indexed universal life insurance also comes with a high level of investment risk.

Guaranteed Issue Life Insurance

This insurance provides a lesser amount of coverage which is specifically for end-of-life expenses. This is the best option for those looking for fewer death benefits to fund final expenses or who can’t get a standard policy. Even though guaranteed issue life insurance can amass cash value, it’s not their policy’s primary objective.

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Is Cash Value Life Insurance Right for You?

The amount of risk you are willing to take and the flexibility you desire will determine whether you should get a cash value life insurance policy. The whole life policy is simple, as everything about it is fixed. The death benefits from the cash value, and the premium is all guaranteed.

Universal life insurance allows you to change the premiums and the level of coverage. Different options offer different risk levels regarding the cash value increase.

Instead, consider a term life policy if you only need simple, short-term, low-cost coverage. You’ll need the guidance of an experienced agent. To decide if cash value life insurance is the best option for you, seek the opinion of a specialist.

Death Benefits and Cash Value: What Are the Differences?

Basically, there are some significant differences between a policy’s death benefits and its cash value. They are:

Concept

The death benefit is the total money a beneficiary will receive after the policyholder’s death. On the other hand, the cash value is a form of saving that accrues with time.

Accessibility

Only the beneficiaries named by the policyholder at the policy purchase can access the death benefit. In comparison, the policyholder can access the cash value while still alive.

Fluctuation

The amount of the death benefit is not likely to fluctuate. On the other hand, the cash value is subject to fluctuations.

How Can You Access the Cash Value?

Accessing the cash value of your life insurance requires some simple steps, of which you should note certain things. You can use it for a loan, surrender it in exchange for cash or withdraw it. Just do what works for you.

Loans

You can access your cash value by asking your insurance provider for a loan. Unlike regular bank loans, this loan attracts a lesser interest rate. If a policyholder acquires a loan and can’t pay till death, they would subtract the amount from the death benefit.

Cash Withdrawal

This policy allows you to withdraw your cash value for your use. However, be aware that you’ll pay tax for such a withdrawal. Generally, looking out for your policy’s criteria before withdrawing is advisable.

Surrender Policy for Cash

If, at some point, you do not want to continue with the policy, you can surrender it for the cash value. This means you can no longer make payments and have renounced your death benefits. You’ll also pay tax for surrendering your policy. Therefore, you should consult an insurance advisor before taking the step.

Pay Your Premiums 

A time will come when you no longer want to pay your premium. You might want your policy to pay its premium with the cash value. A ‘paid up’ option is included in your policy to naturally perform this action.

Cash value life insurance conclusion

Cash value life insurance is a financial instrument that offers policyholders savings and investment opportunities. It has flexible premium options that help minimize the risks of market fluctuations. 

Nevertheless, you must understand and compare it with other options. This is to know what your best fit is and what your budget can cover. When there is proper planning and research, you have secured your financial future with cash value life insurance.

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Offers shown here are from third-party advertisers. We are not an agent, representative, or broker of any advertiser, and we don’t endorse or recommend any particular offer. Information is provided by the advertiser and is shown without any representation or warranty from us as to its accuracy or applicability. Each offer is subject to the advertiser’s review, approval, and terms. We receive compensation from companies whose offers are shown here, and that may impact how and where offers appear (and in what order). We don’t include all products or offers out there, but we hope what you see will give you some great options.

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September 21, 2023
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FAQs about cash value life insurance

Do all life insurance policies have a cash surrender value?

The amount of money you get on the termination of your policy is known as Cash Surrender Value. However, you can’t access this CSV in term life as it’s only available in whole life, universal life and variable universal life policies.

What happens to the life insurance cash value after death?

Upon the death of a policyholder, the death benefit of the policy and not the cash value will be given to the person's beneficiary. Usually, the insurance company takes whatever money is in the policy's cash value, so it's essential to use your policy's cash value while still alive. However, there are times when the company allows the transfer of the cash value to the death benefit.

Should I get a life insurance policy with cash value?

This depends on your family's financial objectives; no plan is generally acceptable. You can consider permanent life insurance for a guaranteed death benefit with extra investment opportunities and bonuses. In contrast to term plans, their premium costs are higher.

Should I choose to get a life policy with cash value?

Cash value life insurance is advisable for any permanent needs, such as lifelong dependents and estate planning. Although these policies come with fees and are more complex than term policies, contacting an insurance professional is better.

What happens when a policy is surrendered for cash value?

The length at which you hold the coverage determines what happens. There’s every possibility that you’d pay surrender fees less than the amount you’ll receive if the item is not too old. It’s also important to note that for every policy earnings, there would be tax payable.

Cash Value Life Insurance made simple

Get the full scoop on cash value life insurance.

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