Cash value life insurance policies differ from term policies in many ways. There are also several different types of cash value policies, resulting in much more variety. Below are descriptions of some of the features of cash value policies. Though not all are unique to cash value policies, it is important to recognize their significance and identify which features are attractive to you.
Permanent Protection
Cash value policies can offer permanent protection that doesn’t need be renewed (or lapse) at the end of each period like term insurance. Cash value policies stay in force until the policyholder dies or until the policy lapses due to missed payments, cancellation, etc.
Inflation Risk
Because these policies are long-term, policyholders may consider having the policy’s face value indexed with inflation or increased at predetermined intervals. This will assure that the face value of the policy remains adequate decades after the policy is signed.
Cash Accumulation
In addition to death protection, cash value policies also include a cash savings aspect that allows for much flexibility. This cash value can be borrowed against, withdrawn as a lump sum, delivered as an annuity, used to pay premiums or several other options depending on the company and kind of policy. It is important to remember that beneficiaries are only entitled to the face value of the policy upon death. The policy holder may be entitled to the cash value in the amount of the surrender value of the policy if the policy is surrendered. With whole life, cash value and death protection are bundled. With universal life they are not bundled and differentiation between the two is expressed clearly.
Forced Savings
Because the premium includes both the cost of coverage and an amount to be directed towards cash savings, cash value policies also act as a forced savings. This can be beneficial to individuals who want help saving money and wish to bundle death protection and investments.
Level Premiums, Lower Premiums
Because cash value policies offer lifelong protection, the cost of coverage is spread over the life of the insured. This can mean relatively lower premiums due to a longer payment time line over which to distribute the cost. Because the cost of coverage is calculated at the beginning of the policy, premiums can be made equal over the life of the policyholder. Though this will mean relatively higher payments in the earlier years, these are working years. This means that later in life after the policyholder retires, required premiums will be significantly lower than the actual cost of coverage. This is because as age increases the cost of coverage increases significantly, especially beyond age 65.
Flexibility in Premiums
Cash value policies offer much flexibility in premiums. Aside from the ability to use dividends or part of the cash value to pay premiums, there also exists the ability to customize the premium payment schedule. Policyholders can elect to make payments only for a certain number of years, after which time premium payments stop. Though this means premium payments will be higher, cash values accumulate more quickly and premium payments will be required for a shorter period of time. The option to make a single premium payment as a lump sum also exists.
Investment Choice
Cash value policies combine death protection with investments. The cash value portion of the policy is invested in some way. Depending on the type of policy selected, the policy holder may have all, some or no control over how funds are invested. Some types of policies also allow the amount of death protection to be affected by investment performance. Some of the more volatile investment/policy options retain a minimum amount of death protection for the policy holder. Keep in mind that with higher possible rates of return comes the requisite higher risk of loss. It is important to understand applicable rules and restrictions. Investments in insurance vehicles often do not perform as well as comparable standalone investments, especially after administrative costs are factored in.
