Cash Value Life Insurance Products – An Explanation

Posted by MoneySavvy on Jul 24th, 2010 | no comments home title

Life insurance is one of the responsibilities that need to be considered when you become an adult. It’s a way to take care of your family and your financial obligations in the event of your death. When comparing life insurance options and products you’ll likely come across a term called “cash value life insurance.” Here’s an explanation of what it is so you can make an educated decision based on your life insurance needs.

What Is Cash Value Life Insurance?

According to Investorwords, cash value life insurance is, “A life insurance policy which in addition to providing a benefit upon the death of the policy holder, also accumulates cash value over time enabling benefits to be paid out before death.”

Also called permanent life insurance, you don’t have to renew it like you do a term product. It’s designed to provide life insurance coverage for your entire life. There are no renewals. You simply continue to pay your premium. Cash value life insurance was created as an investment opportunity. It offers some potential benefits including:

There is no income tax on interest or other earnings credited to cash value. As the cash value accumulates, it is not subject to current taxation. And you don’t have to pay income tax if you borrow cash from the policy. You can treat the policy as a loan and borrow from it.
Your heirs pay don’t pay income tax on proceeds. Your beneficiaries receive death benefits completely free of income taxation – this is true of all life insurance policies.
You can structure the policy to avoid estate taxes and probate costs on policy proceeds.

A Word of Caution

While many financial advisors are happy to promote cash value life insurance products, the truth of the matter comes down to what you really get for your money. According to Kiplinger’s Personal Finance magazine and Fortune magazine, the rate of return for cash value products is around 2.6% per year for whole life, 4.2% for universal life, and 7.4% for a variable life policy that includes mutual funds.

And from your earned interest you’ll pay a whole lot of fees, commissions and expenses. In short, most financial experts recommend buying term life insurance, which costs a lot less per month, and investing your money in mutual funds and other investments which will undoubtedly earn more than 7.4%.

It’s Your Call

There are benefits to purchasing cash value insurance products. It offers a few tax advantages and the ability to borrow from the product. However, if you’re looking at the numbers and your rate of return over time, it’s better to steer clear of cash value life insurance products.