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Cash Value Insurance

Cash Value Insurance is coverage that combines a cash value accumulation feature with death benefits. As a buyer of this type of policy, you will have to pay more in the early years than you would have to for term life insurance, but the premium that is not used to pay for the death benefit accumulates with interest within the policy.

If the policy is surrendered before the insured policyholder dies, the owner may be entitled to a cash payment after the subtraction of any outstanding loans against the policy.

Because of substantial surrender penalties, it is not a good idea to purchase this type of policy if you have knowledge or an idea that you may surrender it early.

If all premiums are paid, cash value insurance usually lasts for the entire life of a person and pays death benefits to the beneficiaries named in the policy upon the death of the insured. The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy. Any outstanding loans are deducted from policy proceeds at death or at the time of policy surrender.

Types of Cash Value Insurance:

  • Whole Life Insurance is designed to provide coverage for the whole life time. It keeps the premium lower by stretching out the payments over a longer period of time.
  • Universal Life Insurance treats the three elements of the of the policy, premium, death benefit, and cash value, separately. With this policy, the policy holder can change or skip premium payments and/or change the death benefit more easily than with other policies.
  • Variable Life Insurance has a death benefit that varies in relation to the investment experience of the assets underlying the policy.
  • Variable Universal Life Insurance combines the flexibility of unversal life and insurance with the investment account features of variable life insurance.

Some cash value insurance products may offer tax advantages while the remain active. Therefore, a policy lapse or surrender may create a taxable event and may generate Form 1099. Form 1099s are sent to the Internal Revenue Service (IRS) for tax purposes.

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