Cash value life insurance policies, also called "whole life" policies, are often touted as being the best you can get. While they do have some good benefits, the truth is that people have different needs and it may not fit yours. The best way to discover whether or not it fits your needs is to take a look at the pros and cons of cash value life insurance.
The pros of whole life insurance
Here are some of the good things that you will probably hear when you talk to an insurance agent about cash value life insurance:
1. It builds cash value
This is the feature that gives a cash value life insurance policy its name. Over time, the policy accumulates cash, giving the policy owner access to it when it reaches an amount specified in the policy. In order to build this cash value, a portion of the premium is designated toward the cash value, but only after the agent receives the commission. Term insurance has no cash value at all.
2. The premiums are always the same
Since a whole life policy covers the insured for the lifetime of the individual, the premiums never change. The premiums are determined when the policy is written, and there can never be any surprises concerning the cost. This enables the policy owner to be able to anticipate the next payment — or payments 10 years in the future.
3. The cash can be accessed at any time
Once the policy has a sufficient cash value, which may take somewhere between three and ten years, the policy owner may borrow the available cash, without any taxes having to be paid on it. It may be borrowed for whatever purpose is desired: for education, for an emergency, to pay bills, etc.
4. There is no need to worry about renewal
Cash value life insurance policies never expire, so there is no need to worry about missing a renewal. Also, owners never need to be concerned about whether they will be denied renewal if their health worsens.
The cons of a cash value life insurance policy
Here are some things you may not hear from a life insurance agent:
1. The money borrowed decreases the policy's face value
While a policy may be for a face value of $50,000, any money borrowed will decrease the face value by the borrowed amount. For instance, if $10,000 is borrowed from the policy, then in the event of the death of the insured, the beneficiaries would only receive $40,000.
2. The money borrowed has interest
Just like any loan, borrowing money against a cash value life insurance policy will have interest charges. Interest is often around eight percent, and it accumulates over time. If the loan is not paid back, the interest owed further decreases the face value of the policy.
3. Some forms of cash value insurance are not guaranteed
At Money.USNews, it is mentioned that there are some variations of whole life policies available. Some of these may be more comparable to term life policies, but the problem is that interest rates on the cash value may not be guaranteed.
When buying life insurance, each person will need to consider the needs and goals of coverage before buying. It is also a good idea to have the agent present more than one option before deciding on a cash value life insurance policy.