Cash Value is the liquid portion of a whole life policy’s death benefits. It grows at different rates for different insurers, building up in the policy and creating these living benefits. The more cash build up you have, the more living benefits you’ll enjoy. But just what are those living benefits? What is cash value really and what can you do with it?
When you enter into a contract with a mutual insurance company through the purchase of a whole life insurance policy you essentially become an owner of that company. As you deposit money into your policy, you not only have a guarantee that you will never lose principle, but you are also guaranteed a growth component on your cash value. Many insurers also pay an annual dividend to policy holders, allowing you to benefit from a company’s excess profits.
The benefits don’t end there. If you examine a whole life contact, you will learn that your cash value provides you access to loans with tax advantages. The policy has a contractual guarantee, which allows you to loan against your cash value, tax free. This means that as your cash value accumulates, you are also able to use the insurance company’s money to make purchases or investments. The lifetime, tax-free benefit means the loan will continue to be untaxed, even if it is not repaid, until your death. Though is it not required, it is advisable to pay back your loans so that the interest on borrowed cash value does not continue to accrue, diminishing your death benefit.
Cash value allows you to leverage your policy as you make ongoing contributions, increasing personal financial growth by leveraging guaranteed policy growth, company dividends, and the tax advantages of borrowing against cash value.
Q: How do living benefits in insurance policies differ from traditional life insurance?
A: Living benefits in insurance policies provide benefits while the insured is still alive, offering financial assistance for critical illnesses, chronic conditions, or long-term care, whereas traditional life insurance primarily pays out upon the insured’s passing.
Q: How can individuals leverage living benefits in their financial planning to address potential health-related expenses?
A: Individuals can leverage living benefits by incorporating them into their insurance coverage, ensuring they have financial support for medical costs, rehabilitation, or other health-related needs that may arise.