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What Is Cash Value Life Insurance?

Cash value insurance has some attractive features that are worth investigation.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 02 November 2014
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Cash value life insurance is a more expensive type of insurance where some of the money paid in premiums is placed in savings accounts or invested so that it begins to grow. As the policy ages, this value becomes accessible to policyholders. While amounts accessible in the first few years of paying for the insurance aren’t high, over time, the policy can build a certain amount of equity that might be either used to take over insurance payments at a set point or borrowed from the policy for necessary expenses. This insurance can also be called permanent or lifetime insurance and may have set premiums. Cash value differs from term life insurance, which expires at a specific point leading the holder with nothing and the potential of paying much higher premiums to get insurance again.

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There are big fans of cash value life insurance and those who feel it is a poor investment strategy. Premiums are much higher in cost than those for term life, and only a portion of the money paid is set aside in a savings or investment accounts. On the other hand, this money is exempt from taxes if it is borrowed and a whole payout may also be exempt. Generally, this form of life insurance is criticized because many people might follow a more successful investment strategy by buying term and using the difference between cash value life insurance premiums and term payments to make personal investments, which may have a higher performance rate and are actually much larger than the percentage of money cash value life typically invests.

Nevertheless, there are people who like the security of cash value life insurance for several reasons. With permanent insurance and set premiums, people don’t need to worry about finding a term life insurance plan in later years when payments get progressively more expensive. Most types of this coverage don’t ever expire, provided people keep making payments. When cash value begins to accrue, policyholders can borrow the money from that value if they need to keep making payments but have economic difficulties, or they can cash the whole plan out.

Additionally, when the cash value life insurance reaches a certain point after years of payments, if policyholders choose not to touch the cash, they may not have to make payments anymore. They’d still get the life insurance payment upon death, minus the cash value. Cash value usually isn’t very high, perhaps $10,000-20,000 US Dollars (USD) when a plan is fully vested, and the policy could be worth $100,000 USD or more.

From a financial standpoint, especially early in life, buying term tends to make better sense, leaving people with more money to save or invest than the amounts that would be invested in a cash value policy. In contrast, cash value insurance has some attractive features that are worth investigation. People planning on investing in insurance should spend some time reviewing pros and cons of both prior to making a decision.

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