Life insurance provides a safety net for your loved ones when you die. In certain circumstances, life insurance can also benefit you while you're alive. Some permanent life insurance policies have a cash value that accumulates over time. This cash value can provide a financial cushion for your family to pay for emergencies or planned expenses like a home down payment or college tuition. Here are some ways your life insurance policy cash value component can enhance your long-term financial strategy. 

What Is Cash Value in Life Insurance?

Cash value is a benefit in some permanent life insurance policies that you can use while alive. As you pay premiums in your life i♛nsurance policy, the life insurance company allocates a portion of that premium to your cash value, which grows tax-deferred. The underlying strategy to invest and build cash value i𝓀n your account varies based on the permanent policy type.

You can acওcess your cash value for various purposes, such as covering unexpected expenses, supplementing retirement income, a♏nd paying college expenses. 

You can withdraw up to what you paid in premiums tax-free but owe income tax for withdrawing your gains. Alternatively, 🗹a common practice is for policyholders to take a loa🅘n against their policy instead of withdrawing the funds and creating a taxable event. 

Types of Life Insurance Policiesಌ With Cash Value

Several types of permanent policies offer c🉐ash value accumulation as a benefit. Each policy type has different features and accumulation strategies, but all cash value grows tax-deferred regardless of the associated policy.  

Whole Life Insurance:

Whole life insurance policies are permanent policies with fixed premiums and both a death benefit and a cash value component. The cash value in these policies grows based on a predetermined formula that accounts for the policy's benefit amount and projections from the life insurance company. The day your policy is issued, you should be ableꩲ to track your account's predicted 🍃cash value each year you hold the policy.   

Universal Life Insurance:

Like whole life insurance policies, 澳洲幸运5开奖号码历史查询:universal life insurance policies have a death benefit and a cash value component. The key difference between these products is universal life insurance's flexibility. Universal life policies are like choose-your-own-adventure books but for life insurance. Policyholders can adjust their premiums and death benefits. Cash value in these accounts grows based on current market interest rates and is somewhat variable. You can’t predict exactly how muchꦇ your cash value will grow like with whole life.

Variable Life Insurance:

澳洲幸运5开奖号码历史查询:Variable life insurance policies are what would happen if a permanent life insurance policy and an investment account had a baby. Variable policies have a death benefit and a cash component, but unlike other permanent policies, the account's value depends on market performance.

Variable life insurance policies allow policyholders to select subaccounts where their money is invested. These subaccounts are similar to mutual funds, and the account's value directly correlates with the subaccount's performance. Because of the variability in account value, these types of policies are riskier than other types of permanent insurance. 

Uses of Cash Value in Life Insurance

You can use your cash value while you're alive for several purposes, such as accumulating savings, supplementing your retirement income, paying your life insurance premiums, or even helping offset the costs of a major purchase like college tuition or a home down payment.

Accumulate Savings

A portion of each premium payment in most policies goes towards cash value accumulation, which grows tax-deferred. Because this money is tax-advantaged and in an accessible but easily accessible account, cash value 🐟components of life insurance policies can make an excellent rainy day fund.  

澳洲幸运5开奖号码历史查询:Dr. Nicole Simpson, CFP, founder and CEO of Harvest Wealth Financial, told Investopedia that "using your cash value to cover unanticipated expenses or to purchase large t🐎icket items that may be outside the scope of their usual expenses" is a significant perk of life insurance with cash value.

Help Supplement Your Retirement Income

The cash value of a permanent life insurance policy can supplement retirement savings if your primary retirement savings won't be enough. Unfortunately, feeling like you will run out of money before you run out of life is a relatively common problem with Americans today. According to the National Institute on Retirement Securities 2024 study, more than half of Americans (55%) are concerned that they will not be able to achieve financial security in retirement. The 🌊cash value of life insurance c♏an help alleviate those worries for some.

Policyholders can chooseꦿ to take a loan from their cash value or withdraw their cash value to help make ends meet in retirement. However, managing these withdrawals or loans carefully is especially important if you still need to preserve a death benefit. 

澳洲幸运5开奖号码历史查询:Chloe A. Moore, CFP, the founder and principal of Financial Staples, cautioned, "If you are taking money out and not paying it back, when your cash value gets to zero, you have no more 澳洲幸运5开奖号码历史查询:death benefit." This highlights the need to balance short-term financial needs with the long-term goal of preserving the💮 policy's benefits.

Pay for a Large Expense

Just like how you can use your cash value in your life insurance to supplement your retirement income, you can use your cash value to pay for planned large purchases. These large purchases may include a home down payment, college tuition, a car, or even a yacht if you're the seafaring type. 

Before withdrawing cash from your cash value to 🀅pay for a large expense, you should analyze your current insurance needs. Taking money from your policy reduces your death benefit until the full amount (plus interest) is paid back. 

Cover Future Insurance Premiums

You can tap into your cash value to cover your monthly life insurance premiums. That can help you pay for the coverage when facing a budget crunch. If your cash value is growing morꦺe per year than your annual premiums, you could use that to cover the costs indefinitely so you don’t have to pay anymore. 

How To Access the Cash Value of Life Insurance

You have a few choices when accessing the cash in your life insurance policy. Some options are better suited for certain circumstances, so before taking your money, it's vital that you de🦂termine your current death benefit coverage needs and c🌃arefully review any terms and conditions of your policy.

Make a Withdrawal

Your life insurance policy won't come with a debit card you can use at the life insurance policy ATM, but you can withdraw funds directly from your cash value. You transfer the money to your checking account for spending.

Policyholders may withdraw their current cash value or a portion of it. Withdrawals reduce the death benefit, so consider the long-term impacts on your beneficiaries before proceeding. 

Take Out a Loan

Loans against cash value are another way that policyholders may access their cash. Some find loans attractive because they are considered collateralized and have a lower interest rate than loans procured elsewhere for similar amounts. Additionally, the loan terms are typically more lenient than other loans, and many allow you to take a loan up to 90% of your cash value. 

You also have the option to repay the loan, so your death benefiܫt returns to the full amount. Unpaid outstanding loan amounts reduce the death benefit and may continue to accrue interes꧒t. Due to interest accrual, loans not paid back can reduce the death benefit to zero over time.

Surrender the Policy

Policyholders with cash value can cancel or 澳洲幸运5开奖号码历史查询:surrender their policy and walk away with the cash value. Policy surrender is typically a last resort because it wholly and immed൲iately removes the policy's death benefit. Still, some policyholders, especial💙ly those with multiple life insurance plans, may surrender to enjoy the money while alive or supplement waning income, especially if they no longer need life insurance coverage.

Moore said surrendering the policy for cash value is an option for those with adequate death benefit coverage. Still, she prefers using life insurance policies for life insurance needs only and investments for wealth accumulation, especially since, historically speaking, investments will outperform the return of your life insurance.

Swap the Cash Value for a Paid-Up Policy

If you no longer want to pay insurance premiums but still want to keep some coverage, you could surrender your cash value for paid-up insurance. The death benefit will be smaller than your existing policy, but it will no longer charge you. Your insurer can tell you how much paid-up insurance you could get in exchange for your cash value. 

The Bottom Line

Cash value life insurance can benefit your 澳洲幸运5开奖号码历史查询:beneficiaries when you're gone while still allowing you to benefit when you're alive. The money you pay into your life insurance policy for the rainiest day c💞an help you accumulate wealth, supplement your retirement, pay for a major purchase, or cover other financial needs. 

While life insurance policies with cash value components afford policyholders a wider range of access to their money, utilizing them still requires careful planning and consideration as part of your overall financial plan. 

If you're unsure how to use a cash value life insurance policy best to make your dollars and death benefits work for you, consider consulting a financial advisor.