You’re probably already aware of just how important life insurance is. This is especially the case if your family depends on the money you earn. Life insurance is a must-have because it will protect your family if something unexpected were to happen to you. After all, it will be up to your family to pay mortgage bills and buy groceries, so they’ll need to have enough money to do this.
Life insurance can be pretty confusing, as there are different types to choose from. You may also get confused by the different terms associated with these documents. However, the one thing that you need to remember is that there are two basic types of life insurance – term and permanent. Term life insurance represents the simple and more affordable option, since the policy doesn’t have guaranteed cash value.
On the other hand, permanent life insurance has more features. One of the best features that this type of insurance offers is known as lifelong coverage. Basically, your death benefit will be guaranteed if you pay your premiums. Another great feature is cash value, which is an investment element that can be of use to you while you’re still alive.
With this savings component included in your life insurance policy, you will be able to use it for numerous things like supplementing retirement income, paying your policy premium or taking out a loan at a low rate. Of course, it’s important that you first understand how you can accumulate cash value.
Accumulating Cash Value
Whenever you make a life insurance payment, the money gets split into three different categories. One portion of the money goes to the death benefits of the insurance policy. Another portion is used to cover the operating costs and profits of the insurance company, while the rest of the money is allotted to cash value. As long as you make regular payment over the years, you will see your cash value growing.
Even though you’ll see your cash value constantly growing as long as you make payments, it’s worth noting that this accumulation will slow down over time. This is because the cost of insuring your life will get more expensive for the insurance company as you grow older. In other words, more of the money from your payments will go towards the cost of insurance after each year. This is the same reason why you may have noticed that a term life policy is more expensive the older you are.
It’s important to note that cash value builds differently depending on the type of policy that you have. For instance, cash value in a universal life policy will grow based on current interest rates. The growth of cash value in a whole life policy is based on a formula that a particular insurance company uses. Finally, cash value in a variable life policy varies depending on investments made in subaccounts.
Accessing Cash Value
Since premiums for cash value life insurance policies are known to be quite expensive, you’ll need to know exactly how you can take your money out of them. One of the best options would be paying your life insurance premiums by using the cash value. You can also take out a loan from the insurer that you can use for pretty much anything from purchasing a new home to paying some expensive medical bills. This is a great option because you’ll be able to keep the loan outstanding for as long as you want and it won’t appear on your credit report.
In case you no longer need your policy, you can sell it for a life insurance settlement. You should consider this option if you don’t have dependents anymore and if the premiums are too expensive for you.