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Cash Value Life Insurance PDF Print E-mail

Cash Value (or Permanent) Life Insurance

Cash value life insurance generally has higher premiums than pure term insurance. This is because a portion of the premium is used to pay mortality costs such as term insurance premiums, and a portion goes into a "savings account" for your benefit. The savings component is usually called "cash value" and can be used for supplemental retirement income, a source of emergency funding, or to pay down a mortgage, etc. Unlike term insurance, with cash value insurance the death benefit is guaranteed to always be there as long as you pay the necessary premiums. Because of front-end expenses, we recommend cash value insurance be purchased by those who plan to hold the insurance for long periods of time (at least 10 years).

Cash value life insurance has several tax advantages. The growth of cash values in a life insurance plan receives preferential tax treatment, since interest or growth is not subject to current income taxes. Cash withdrawals from a cash value life insurance contract are also accorded tax advantages. Some cash value life insurance contracts offer investment choices by allowing the customer to select how the money is invested among 10 or 15 "separate accounts". These separate accounts might include stock funds, money market funds, global growth funds, etc. Life insurance that provides these separate accounts is called Variable Life.

Cash value life insurance policies are increasingly used to augment existing retirement vehicles (IRAs, pensions, investments, etc.). Generally, a life insurance policy is written and large premiums are paid into it in the early years. The cash values build up on a tax- deferred basis, meaning there are no current taxes due. By combining the preferred loans and partial withdrawals (in correct proportions), the consumer can withdraw more money from the life insurance than was originally invested without paying taxes on the gain. Eventually, the income tax-free death benefit pays off the loan.

If a consumer decided to pay $3,000 annually, he/she would buy the smallest amount of life insurance the law would allow. Minimal death benefit allows most of the premium to accumulate at interest (not spent on mortality expense). Care must be taken not to exceed the premium/death benefit ratios the law allows. Doing this will allow the life insurance contract to retain its tax preferential treatment. After loans and partial withdrawals are taken from the policy (say, after retirement), it is important to keep the life insurance policy in force. Surrendering the policy could trigger a significant income tax bill. At death, there is no income tax problem because life insurance death benefits are income tax free. When there is already a need for life insurance, the approach listed above can be a powerful supplement to existing retirement plans.