A cash value life insurance plan provides a savings element that attracts many Americans. And life insurance has become a priority for everyone in today’s world. But is this type of plan worth the extra costs? And how does it work in the first place?

A cash value life insurance plan protects your family

How Does a Cash Value Life Insurance Plan Work?

The words “cash value” draw you in immediately. But you have to dig deeper to gain a better understanding of this policy option.

So what is a cash value life insurance plan, exactly? It’s a form of permanent life insurance with an investment feature through cash value savings. In fact, every policyholder can use the cash value for a variety of purposes. And you may be able to access this money while you are still alive.

This is how it works: A portion of your premium payment goes toward insuring your life. The remaining portion goes into a cash value account. This account accrues tax-deferred interest over time.

You can withdraw or borrow against this money in case of an emergency. For example, there are four ways you can access the cash value, depending on your specific life insurance policy. You can…

  • Make a withdrawal
  • Pay your premiums with the cash value
  • Surrender the policy altogether
  • Take out a loan.

Now, this may sound like a sure thing, and it might be a useful plan for many Americans. However, there are drawbacks to a cash value life insurance plan. And the key factor is cost.

In general, these plans are more expensive than traditional term life insurance policies. This means your premiums will be higher from the start. But, unlike term life insurance policies, cash value policies do not expire after a specific number of years. Most prominent insurance companies offer this type of plan, including State Farm, Mass Mutual and Pacific Life.

The concept is clear. The death benefit pays out to the beneficiary once the insured person dies. And the money in the cash value account is available to the policyholder while they are still alive.

Accessing Your Cash Value Account

You will have access to your cash value account right away. And you can make a tax-free withdrawal from your cash value life insurance plan. However, the government taxes it as income if your withdrawal exceeds the amount you’ve paid into the cash value portion of your policy.

Moreover, any withdrawal you make from your cash value funds will reduce the death benefit paid out to your beneficiary when you pass away.

You can also take out a loan up to the total amount of your cash value account, including accrued interest. This isn’t taxable income, but it will cost your beneficiary if you die before repaying the loan. Any outstanding amount left over will be subtracted from your death benefit.

And if you are struggling to pay your premium each month, you can use the cash value in your policy to help make the payments. If this doesn’t help, you can cancel the cash value life insurance plan altogether. At that point, you’d be paid out the amount you’ve paid into the cash value account plus accrued interest. But the insurer will subtract any outstanding premium balances, unpaid loans and surrender fees beforehand.

Benefits of Life Insurance

Life comes with many unexpected twists and turns. And this is why insurance is so valuable. You always want to be a step ahead in case of emergency or any unexpected circumstance.

To better prepare yourself for the future, sign up for the Wealthy Retirement e-letter below. The experts at Wealthy Retirement have decades of experience helping readers become financially independent and self-sufficient on their path to retirement.

Life insurance provides numerous benefits and protections for you and your family. This is why most Americans sign up for a policy of their own. Whether it’s a cash value life insurance plan or not, you may want to consider doing the same.