Life insurance is an extremely versatile investment option. While the way the instrument is structured is quite simple, there are innumerable benefits that you can obtain from a single life insurance policy. The most widely discussed advantage, of course, is that life insurance gives you a protective life cover that can secure your future and safeguard your family’s financial position in case something unfortunate happens to you.
However, another little-known advantage of a life cover is that you do not need to wait till the end of the policy’s term to enjoy financial benefits. Some life insurance policies such as whole life insurance, variable life insurance, and a universal life cover come with a built-in cash value.
What is the cash value of life insurance?
Cash value of life insurance is effectively the amount you would receive if you decide to surrender your policy to the insurer. When you purchase a life cover, one part of your premium goes towards offering you the insurance, while the rest of the premium is invested in a cash value account, thus earning interest at a modest rate. This value, which accumulates over the course of the investment period, is the cash value.
5 ways to capture cash value in life insurance
The cash value of life insurance can be used for a variety of purposes over the course of the policy’s term. As the policyholder, you need not wait for the policy to mature to tap into the benefits of the accumulated cash value. Here are 5 ways in which you can capture the cash value of your life cover.
Option 1: Avail a loan
You can use the cash value accumulated to avail a loan if you have any emergency expenses that need to be paid off. The advantage of taking a loan against the built-up cash value is that insurance companies tend to charge a more affordable rate of interest for these borrowings. This way, you need not suffer the higher interest rates associated with traditional loans. Additionally, since you are effectively borrowing your own money, you are not obliged to repay the loan. However, keep in mind that if you fail to repay the loan, the unpaid amount is deducted from your death benefits.
Option 2: Use it to pay up your premiums
Over the course of the term of the life insurance plan, you will eventually accumulate sufficient cash value to cover all the future premium charges due. You can make use of this cash value of life insurance to cover all the premiums due after a certain point. This essentially means that your policy is entirely paid up. And by choosing to use your cash value to take care of your premium payments, you can reduce your annual premium expenses by a significant margin. Clearly, this option is useful if you wish to save more on a yearly basis, since you need not pay your life insurance premium any more.
Option 3: Withdraw the cash value
Some insurance companies allow you to make partial withdrawals from your accumulated cash value after a specified period. For instance, if you’ve diligently paid up all the premiums due for, say 5 years, you may be permitted to make withdrawals from the cash value of life insurance. You’re free to use the money withdraw to meet your requirements as you see fit. However, you need to be aware that the death benefit offered by your policy shall diminish, depending on the amount you’ve withdrawn. Ensure that you talk to your insurance service provider to understand how this works for your policy before making a withdrawal.
Option 4: Enhance the death benefits
If you do not choose to avail a loan, make a withdrawal, or pay up your premiums, your cash value essentially remains untouched. In this scenario, you can make a smart financial move by using the accumulated worth of your policy to enhance the death benefits offered by the plan. All you need to do is call your insurer and let them know that you would like to trade your accrued cash value for higher death benefits. Most insurers will agree to this trade-off. By opting for this strategy, you can leave behind a larger legacy for your heirs or your beneficiaries upon your demise.
Option 5: Grow your retirement fund
Another excellent way to capture the cash value of life insurance is to use the investment value as a retirement fund. The value you receive upon surviving the policy’s maturity can be a great way to start your nest egg for the future. It can also boost any other savings you may already have for your post-retirement life. The funds received as maturity benefits are also tax-free, owing to the provisions of section 10(10D) of the Income Tax Act. So, you can enjoy the benefits of the accumulated cash value without being burdened by any tax liability.
Conclusion
Life insurance plans that provide the benefit cash value may also come with higher premium charges. So, if you wish to start off with a more affordable life cover, you could always opt for a term insurance plan. While it may not offer any cash value, it certainly comes with a host of other advantages such as lower premium rates and a variety of rider options. The iTerm Plus plan from Aegon, for instance, is a budget-friendly life insurance policy that offers you a life cover as high as INR 1 crore for premium lower than INR 1,000 each month. Invest in life insurance today, so your future and the future of your family is secure.
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