The Truth About Insurance's Piggy Bank - How Beneficial is it?
Friends, we all know that life is uncertain. But do you know that the insurance taken to protect your family from this uncertainty of life can be equally complicated? Today we are talking about that piggy bank of life insurance which is called "Cash Value". It is very important for you to know what is this cash value and how beneficial it can be for you. It may happen that you get the insurance done, but do not understand its real power!
The Cash Value Game - A Mix of Savings and Security
Cash Value Insurance Policy is a special type of life insurance which is also called "Permanent Life Insurance". This policy is not limited to providing financial help to your family after death. One of its specialties is that a part of every premium keeps getting deposited in a kind of piggy bank. This is called cash value. This piggy bank keeps earning interest and this amount keeps increasing with time.
This simply means that you are doing two things simultaneously. First, you are getting your family insured to protect them from future financial problems. And second, you are also saving in a way. If needed in the future, you can take a loan from this cash value or you can also withdraw it completely. (However, before doing so, do understand the terms of the policy!)
Benefits Are There, But Caution is Necessary
A policy with cash value can be beneficial in many ways. But, these benefits are available only when you understand this policy correctly and take it according to your needs.
A Way to Save: As we mentioned, cash value is a way of saving. You earn interest on the amount deposited every month as premium. This interest is tax-free, meaning you do not have to pay tax on it.
Emergency Needs: Sometimes in life, money is suddenly needed. At such times, you can take a loan from the cash value. You will have to pay interest on taking a loan, but this interest rate is usually lower than a bank loan.
Maintain Policy: Sometimes it becomes difficult to pay the premium due to financial difficulties. If you have cash value, you can use this amount to pay the premium and save your policy from being discontinued.
Disadvantages of Cash Value: Should You Take This Policy?
High Premiums
One of the biggest disadvantages of a cash value policy is its high premium. This policy is much more expensive than term life insurance. The reason for this is that in a cash value policy you not only get death benefits, but it also has a savings feature. Therefore, you have to pay a higher premium every month.
Lower Returns Than Investment Options
The interest received in a cash value policy is usually less than other investment options such as the stock market, mutual funds or fixed deposits. This is because insurance companies give guaranteed returns to their customers. Because of this, they cannot take much risk, which also keeps their return rate low.
Lack of Liquidity
While it is possible to take a loan or withdraw from the cash value, the process can be a bit complicated. You may have to submit some documents and the insurance company will have to approve your application. Also, if you want to withdraw the cash value completely, your policy will expire.
Tax Implications
You do not have to pay tax if you take a loan from the cash value, but if you withdraw the cash value completely, you may have to pay tax. Also, if you die and your family gets the cash value, it may also be taxable.
Should you buy a cash value policy?
Despite these disadvantages, a cash value policy can be a good option for many people. If you want to provide financial security to your family and also want to save, then this policy can be beneficial for you. However, before you buy any policy, it is important to keep your needs and budget in mind. You can talk to an insurance agent and choose the best policy according to your needs.
Cash Value vs. Term Life Insurance: Which One is Better?
So far we have discussed in detail about cash value life insurance policies. But, did you know that there is another type of life insurance policy, called term life insurance? In this chapter, we will compare these two policies so that you can understand which policy is more suitable for you.
Term Life Insurance: Only Death Benefit
Term life insurance is a type of life insurance policy that provides cover for a fixed period. If you die within the policy term, your family gets a death benefit of a fixed amount. But, if the policy term expires and you are alive, you get nothing.
Comparison of Cash Value and Term Life Insurance
Premium: The premium of term life insurance is much lower than the cash value policy. This is because term life insurance only offers death benefits, while cash value policies also offer savings features.
Cover: Term life insurance usually offers more cover as you can buy more cover for the same premium. Cash value policies offer slightly lesser cover as they also offer savings features.
Savings: Cash value policies offer savings features, while term life insurance does not offer any such features.
Returns: The interest rate on cash value policies is usually lower than term life insurance, as we discussed earlier.
Which policy is better for you?
Which policy is better for you depends on your individual circumstances. If you only want death benefits and do not want to save, term life insurance may be a better option for you. On the other hand, if you want to save and provide financial security to your family, a cash value policy may be suitable for you.
Cash Value and Taxes: Do You Have to Pay Taxes?
A life insurance policy with cash value has a savings feature that can increase your income. You may have to pay taxes on this increased income. In this chapter, we will discuss cash value and taxes in detail.
The Relationship Between Cash Value and Taxes
Increase in Cash Value: When the cash value increases, it can be considered as your income. You may have to pay taxes on this income.
Taking a Loan from Cash Value: If you take a loan from cash value, you usually do not have to pay taxes. This is because you are taking the loan from your own money.
Surrendering Cash Value: If you withdraw the cash value completely, you may have to pay taxes. This tax is considered as your income.
Tax on Death Benefit: If you die and your family receives death benefits along with cash value, then that death benefit may be taxed.
Important Points for Cash Value and Taxes
Tax Rates: The tax rates on cash value are determined based on your income level.
Tax Calculation: How tax is calculated on cash value depends on the tax rules of your country.
Tax Saving: In some cases, you can reduce or completely avoid the tax on cash value.
Cash Value and Insurance Agents: Do You Need an Agent?
You may need an insurance agent to buy a cash value life insurance policy. In this chapter, we will discuss the advantages and disadvantages of an insurance agent.
Benefits of an Insurance Agent
Expertise: Insurance agents have in-depth knowledge about life insurance. They can help you compare different policies and choose the one that best suits you.
Time Saving: Insurance agents can simplify the policy buying process for you. They can help you submit the required documents and go through the processes required to buy a policy.
Advice and Guidance: Insurance agents can provide you with advice and guidance even after you have purchased the policy. They can help you make changes to the policy or take advantage of the policy.
Disadvantages of an Insurance Agent
Commission: Insurance agents charge a commission for selling you a policy. This commission is based on the premium of the policy you buy.
Sales Pressure: Some insurance agents may put pressure on you to buy a policy. This pressure can cause trouble for you.
Intermediary: Insurance agents act as an intermediary between you and the insurance company. This can sometimes cause problems.
Do you need an insurance agent?
Whether you need an insurance agent or not depends on your individual circumstances. If you don't know much about life insurance or if you don't want to go through the process of buying a policy, an insurance agent can be helpful to you.
However, if you want to learn about life insurance on your own and want to handle the policy buying process yourself, then you do not need an insurance agent. You can buy a policy online or contact the insurance company directly.
Finally, before buying a cash value life insurance policy, you need to consider your needs and budget. You can speak to an insurance agent or look online to find the best policy for you.