November 17th, 2014 by Greg Hopkins
Cash-value life insurance policy is a term that has become increasingly popular as individuals become aware of the significant benefits that this policy provides. In researching this topic, the majority of the articles I have come across are very pro-policy. Most authors and experts were promoting the immense benefits of a cash-value life insurance policy due to the flexible and lenient capabilities. But as everything else in life, it is essential to research and gain a thorough understanding of the potential pitfalls of a cash-value life insurance policy.
A cash-value life insurance policy is a policy that accumulates value during the policyholder’s lifetime. Once the policyholder passes away, the full amount is paid out to the beneficiaries. The actual cash value of one’s life insurance is a portion of the policy’s death benefit that has become liquid. There are three different types of cash-value life insurance policies – whole life, variable life and universal life.
There are two primary benefits of a cash-value life insurance policy:
If used properly, the policy has the ability to be used as a protected investment option. All interest and earnings are nontaxable, which is something all investors dream of.
In general, a cash-value life insurance policy is advantageous for tax purposes; as any withdrawal is tax-free up to the amount of premiums one has paid. This tax-free status is a lifetime benefit throughout the duration of the policyholder’s life. If that policyholder were to pass away, an outstanding loan balance is taxable.
As stated above, it is essential to review the potential pitfalls of this policy:
One of the largest risks is that the actual cash value is the part that individuals withdrawal from. If the individual were to pass away with a loan outstanding, then the total amount (called the Death Benefit) will be decreased by the loan amount. This will limit the amount of funding that your beneficiaries will receive.
A cash-value life insurance policy can also be more costly. If an individual takes a loan out against their cash-value amount, they might be putting their beneficiaries at risk of not receiving the full death benefit due to the lack of repayments. Cash-value loans do not have a requirement to pay back the loan the way a normal bank loan does. The major issue with this is that individuals may not feel as obligated to pay back the loan thereby accruing interest over numerous years. This interest is then offset against the death benefit; ultimately decreasing the amount that your family could have received.
As you can see, this is not black or white policy in terms of the impact it will have on the policyholder. There are many different ways that one’s life situation may affect one’s desire to enroll in a cash-value life insurance policy. Tax laws and regulations are constantly changing. GBQ has certified experienced professionals that can assist you with the execution of a proper life insurance policy. You have worked hard for your money, ensure it is protected.