The essential purpose of a life insurance policy is that of security. It is a safety tool to provide money to your family at the time of your death. But it can also act as a savings account and provide emergency funding in any situation in which you may require a specific amount of money to assist you with debt or to pay unexpected fees or hospital bills. So carrying a permanent life insurance policy with attached cash value, has never been a bad idea.
Policies are not canny tricks to make money – they work purely on what ou put in, and on the provisos you make around payments. However, a useful thing about policies is that you can attach a cash value to your policy. This is a feature often offered within permanent whole life insurance policies. Policyholders can use the cash value as an investment-like savings account and take money from it.
Insurance in the kingdom of cash
Different policy types accrue cash value differently – but in all cases, you are able to access your money via a loan, or withdrawal, or surrender.
A loan: Borrowing against the cash value of your permanent life insurance policy is always an available option, but remember your loan amount will accrue interest until it’s paid back in full. The interest on a policy loan may be charged at a fixed or variable rate calculated on current market rates. If you don’t repay the loan amount and you pass away, the outstanding balance (including interest) will be subtracted from the life insurance paid out to your beneficiaries.
- Withdrawing: It’s also possible to take withdrawals from your policy. If the amount you withdraw includes investment gains, then that portion will be taxable. As with taking a policy loan, making a withdrawal will obviously reduce the eventual life insurance pay out to your beneficiaries later on.
- Surrendering: Surrendering an insurance policy means cancelling the coverage. When you surrender a policy, you can get back the cash value minus any surrender charge. The insurance company will also subtract any unpaid premiums or outstanding loan balance. So it’s preferable to surrender your policy formally, rather than just walk away with nothing.
Good to know
- A canny trick might be to use the attached cash value of your policy to actually pay the premiums. How does this work? If you build up enough money in your cash value account, you may be able to use your cash value to help cover premium payments if you are having difficulty paying your premiums. Using the cash value as an interim measure can help you to catch up and keep the policy live. Just be aware that you don’t drain all the cash value.
- Most types of life insurance have options for adding policy riders that tack on extra coverage or features. One of the most common is an accelerated death benefit, which is often automatically included. This gives you access to your own death benefit money while you’re still alive if you should be diagnosed with a terminal illness. It can be useful for paying medical bills and other unexpected costs.
- The prime tax benefit of life insurance is that your beneficiaries receive the death benefit tax-free. Since life insurance pay outs are usually pretty large, this is an important advantage. A further advantage is that the total cash value accumulates on a tax-deferred basis.
- Also, if you borrow money against the policy, you won’t have to pay taxes on the loan, just as you wouldn’t pay taxes on a personal loan. The loan is not taxable as long as the policy remains in force.
- It’s important to note that should you die, your beneficiaries receive only the policy’s death benefit, but not the attached cash value. In fact, if money is owed on the cash value, this amount will be deducted from the beneficiary’s pay out. However, for higher premium payments, some companies may offer the option for beneficiaries to receive the death benefit plus the cash value.
Life Insurance versus Savings
The upside of insurance policies as savings vehicles means that when weighed against a straight savings account, they offer so many more benefits. You build wealth at a steady, organised pace while protecting your loved ones, essentially combining life insurance and a savings account into one.
- Both your attached cash value and death benefit grow over time. You can then access the cash accrued later in life to spend on whatever you wish, much like a savings account. Of course, there’s also a growing death benefit, which you can leave to your beneficiaries when you pass away.
- Life insurance savings are tax-free – while with a savings account you will pay tax on the interest accrued over time.
- Your benefits and your cash value in your life insurance policy grow value much faster over time than interest gained on a savings account.
- A life insurance policy covers you in a way that savings can’t. However, most savings accounts don’t require a monthly premium, so you can set up savings alongside your term policy and contribute to it at your own pace and design, and later in life you can access both of these savings tools.
- Unlike a term life insurance policy, permanent life insurance coverage has only one premium that you pay for your entire life. There’s no increase. And because life insurance is cheaper the younger you are, the sooner you begin your policy, the greater the financial advantage in later life.