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Ways to Capture the Cash Value in Life Insurance

Nov 27, 2019 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team
Ways to Capture the Cash Value in Life Insurance

Introduction

We have heard it a million times since we stepped into financial adulthood – life insurance policy is an indispensable part of any financial portfolio. Life insurance performs the function of financial protection against the uncertainties of life and eventuality of death. A good life insurance policy will safeguard all your family’s needs if something happens to you. 

Therefore, the primary purpose served by life insurance is that of income replacement. This income goes towards the daily expenses of your family – grocery needs to utility bills and expenses for education, medical needs, etc. In today’s time, life insurance can also serve other financial needs. One side of this is the cash-value life insurance which carries an investment and returns component in it. For example, if you are also planning to save for retirement, you can do so within the policy itself. Referred to as permanent life insurance, cash value life insurance is your answer. These policies not only provide a death benefit but also accumulate cash-value during your lifetime. The whole life policy, variable life and universal life policies fall under this category and bring some unique benefits like

  • Tax-sheltered investment
  • Accumulation of benefit that can be considered legacy for the heir
  • Accumulation of cash that can be used later to pay the premium

Strategies to help you make the most of the cash value in your life insurance

  • Leave a sizable legacy instead

Here’s how this would work: if you have a considerable sum as the cash value life insurance policy and you don’t intend to use this money, you can divert it towards the death benefits. In return for the cash value on the policy, ask your insurance provider to increase the death benefit by that much amount. 

  • Pay for Life Insurance Premiums

As mentioned before, this accumulated amount can be tapped into for premium payments. Most insurance companies will be happy with this arrangement. 

  • A loan against the cash value

The accumulated amount is useful even on its own. If you need funds, you can take a loan against the cash value life insurance at a lower interest rate than a conventional loan. It is, in a way, your own money that you are borrowing.

  • A simple withdrawal

An alternative to the loan is to withdraw some or all the cash value when in need of funds. Of course, such a withdrawal will eat into your death benefit, but the extent to which it consumes the death benefit varies from one policy to another. 

  • Prepare for retirement

Often, cash-value life insurance policies are looked at as supplementary retirement income. If you look at it that way too, make sure you are invested in the long run i.e. at least 10 to 15 years.

  • Surrender

There is always an option to surrender your policy and receive the cash value that has accrued so far. But please note that surrender charges might be applicable here. Further, surrender implies that you are letting go of the death benefits that come with a life insurance policy. Also, note that these receipts are subject to income tax. 

Conclusion

It may not be a great idea to let the cash value life insurance just accumulate without direction. Think about how you can best use and redeploy these funds proactively. 

Read about Sabse Pehle Life Insurance Campaign, an initiative by IRDA to create awareness on the importance of life insurance.


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