You must know about cash value in life insurance policies
What's the story
Life insurance is a crucial aspect of financial planning, particularly in India where family comes first. However, among the different types of life insurance, those that provide a cash value component are frequently misunderstood. This article seeks to clarify the concept of cash value in life insurance, helping everyday Indians comprehend its workings and potential advantages.
Basics
What is cash value?
Cash value in life insurance refers to a savings component present in certain types of policies, such as whole and universal life. It builds value from the premiums you pay, growing at a rate determined by your policy (either fixed or variable). Unlike the death benefit, policyholders can access this cash value through several methods while they are still alive.
Growth
How does cash value grow?
The cash value in life insurance grows in a policy-specific manner. Whole life policies provide growth at a guaranteed rate set by the insurance company, whereas universal life policies offer variable growth linked to the performance of the stock market or certain interest rates. This cash value, built up as you pay your premiums, serves as a substantial financial asset over time.
Utilization
Accessing your cash value
Policyholders can tap into their cash value through loans or withdrawals, but each has its own set of considerations. Loans: By taking out a loan against your cash value, you're essentially borrowing from yourself. However, keep in mind that the insurer will charge you interest. Withdrawals: Unlike loans, withdrawals directly reduce your cash value and can also diminish the death benefit your beneficiaries would receive.
Effects
Impact on premiums and benefits
Having cash value built up in your policy can also influence your premiums and death benefits over time. In certain scenarios, if enough cash value is built up, policyholders can opt to stop paying out-of-pocket premiums altogether and have them automatically paid from the accumulated cash instead. However, taking out too many loans or withdrawals can significantly decrease both the death benefit and accumulated cash.
Selection
Choosing policies with cash value
When choosing a cash-value life insurance policy in India, you should consider premium affordability, investment objectives, risk tolerance for variable components (if any), and long-term financial planning goals. By understanding how various policies handle the growth of the cash-value component, you can ensure that you choose a policy that best fits your personal financial plan.