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Living
with Cash-Value Life Insurance
 Permanent,
or cash-value, life insurance accounts for roughly 80 percent of all individual
life insurance policies.1 This popularity may
exist because cash-value insurance offers a wealth of advantages to the living.
Life insurance can be an important part of a financial plan. It provides
financial protection to surviving family members in the event that something
happens to the insured. In the case of a business, life insurance can help the
business to continue if the owner’s death triggers estate taxes or other
liabilities.2 Of course, these objectives can
be accomplished with either term or cash-value life insurance.3
But consider how cash-value life insurance can be useful during the insured’s
lifetime.
Protection from Increasing Premiums
Permanent life insurance has two parts. It has a savings element that
accumulates cash value over time, and it offers a death benefit when the insured
dies.4 For a young person, term insurance is
usually less expensive, but policies become more expensive as the insured ages
and have no value if they expire before the insured dies. A cash-value policy is
generally more expensive in the early years, but the premium amount can be fixed
for the lifetime of the insured. This means it can potentially become less
expensive than term insurance later in life. Because the policy is permanent,
medical examinations are not required after the policy is in place.
Potential for Cash Accumulation
The cash value in a permanent life insurance policy has the potential to
accumulate over time. Any earnings accumulate tax deferred. This cash value can
be withdrawn during the insured’s lifetime to be used as desired. It can be a
source of retirement income, used to pay for long-term care or a child’s
college tuition, or held in reserve for emergency expenses.
Borrow from Yourself
Loans can also be made against a policy’s cash value. The interest rate will
vary but usually has the potential to be lower than what lending institutions
would charge. If the insured dies before the loan is repaid, the balance
typically is deducted from the death benefit.
It’s often said that life insurance is for the living, but this usually refers
to the survivors. Cash-value life insurance has the potential to benefit the
insured and his or her survivors.
1) Life Insurers Fact Book 2001, American Council of Life Insurers
2) The cost and availability of life insurance depend on factors such as age,
health, and the type and amount of insurance purchased. Before implementing a
strategy involving life insurance, it would be prudent to make sure that you are
insurable by having the policy approved.
3) As with most financial decisions, there are expenses associated with the
purchase of life insurance. Policies commonly have mortality and expense
charges. In addition, if a policy is surrendered prematurely, there may be
surrender charges and income tax implications.
4) The guarantees provided by the insurance company are contingent on the
claims-paying ability of the issuing company.
©
2002 Emerald Publications
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