Life Insurance: What is Cash Value?

Life Insurance comes in many varieties, from relatively simple term policies to more complex whole or permanent policies. Some of these permanent policies include a cash value component. With cash value, a portion of your life insurance policy is invested and may accrue interest over time. Depending on the terms of your policy, you may be able to access this cash value of your policy while you’re still alive. 

At Bogart Wealth, we tend to suggest clients stick with term-life insurance policies. However, each of our clients has different goals, and we want to help you understand the role cash values play in permanent or whole life insurance. 

Types of Cash Value Insurance

While there are many variations, most cash value insurance policies are a variation on a whole life policy that can be boiled down into three categories.

Universal life

This variant of whole life enables flexibility in premium payments and the death benefit, as well as the cash value. Unlike whole life, these policies allow the accrued cash value to be applied to premium payments.

Variable life

 The cash value of this variant can be invested into a variety of funds, such as stocks, bonds, equity funds, money market, etc. This provides the potential for higher returns on the cash value than whole or universal life policies. Of course, it involves the risk of losses as well. As a result, this type of policy is regulated under federal securities laws.

Variable Universal life

With the flexibility offered by universal life, and the higher return potential of variable life this final variant combines flexibility with the potential for higher returns.

Accessing Cash Value

We sometimes see policy-holders forget to capture the cash value in their life insurance policies, meaning the money may go back to the insurance company. It’s as if you (or your heirs) are walking away from tax-free income. To avoid this consider the different ways you might take advantage of the cash value in a life insurance policy.

Increase the death benefit

You may be able to exchange your cash value for a higher death benefit for your heirs. Try to ensure this is a dollar-for-dollar transfer of funds.

Pay for Premiums

You may be able to apply the cash value in your policy toward your premium payments. Depending on your policy and the cost of your premiums, this can be a valuable benefit.

Take a Loan

Many insurers offer loans against the cash value that has accrued in your policy. These loans often come with moderate interest, though you may not have to repay the principal. Keep in mind that if you die before repaying a loan against your life insurance policy, the money may be deducted from the death benefit paid to your beneficiaries.

Withdraw Cash

You may be able to simply withdraw the funds to use for expenses in retirement, including long-term care. Just remember: Tapping into the cash value of your policy may reduce the amount paid to your beneficiaries when you die. This reduction in benefits may be greater than the dollar amount you withdraw. 

These decisions may come with tax implications that we did not cover in this article. Because of that, as well as the many moving parts involved in both life insurance and estate planning, it’s essential that you consult with your advisor as well as tax professionals and attorneys as needed.

At Bogart Wealth, we do not sell insurance, and as fee-only fiduciaries can help you objectively review life insurance coverage. When discussing insurance policies with a broker or salesperson, make sure you understand how they are being paid and if they have any financial incentives to sell you the plan you are considering. 

Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com

Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.
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