Cash value of a life insurance policy is like the 'equity' you build in a house you own and paying off a mortgage. It's an attractive & versatile policy feature
Cash Value: Life Insurance In Canada Explained
Build Cash 'Equity' in Your Life Insurance Policy
The concept of cash value in life insurance policies is a critical component of understanding how these financial instruments work. In essence, the cash value of a life insurance policy is the amount of money that an insurance policyholder would receive if they decided to surrender the policy before its maturity or the insured event occurs. This article will delve into the intricacies of cash value in life insurance in Canada, providing a comprehensive understanding of this important aspect.
The cash value in a life insurance policy is different from the death benefit. While the death benefit is the amount of money that the beneficiaries of the policy receive upon the death of the insured, the cash value is the amount that accumulates over time within the policy. It is a living benefit that the policyholder can access during their lifetime under certain conditions.
Understanding Cash Value
The cash value in a life insurance policy is essentially a savings account that grows over time, tax-deferred. This means that the money in the cash value account grows without the policyholder having to pay taxes on the gains each year. Instead, taxes are deferred until the money is withdrawn or the policy is surrendered.
It's important to note that not all life insurance policies have a cash value component. Term life insurance policies, for example, do not accumulate cash value. They provide a death benefit for a specific term, and if the insured person outlives the term, the policy expires without any value. On the other hand, permanent life insurance policies, such as whole life and universal life, do have a cash value component.
How Cash Value Accumulates
The cash value in a life insurance policy accumulates over time based on the premiums that the policyholder pays. A portion of each premium goes towards the cost of insurance, which includes the death benefit and administrative costs. The remaining portion goes into the cash value account.
The cash value account grows over time based on a predetermined interest rate or the performance of an investment portfolio, depending on the type of policy. In a whole life insurance policy, the cash value grows at a guaranteed rate. In a universal life insurance policy, the cash value can grow based on the performance of an investment portfolio chosen by the policyholder.
Accessing Cash Value
There are several ways a policyholder can access the cash value in a life insurance policy. They can take out a loan against the cash value, make a withdrawal, or surrender the policy. Each of these options has different implications and should be considered carefully.
Loans against the cash value are typically tax-free and do not have to be repaid. However, the amount of the loan reduces the death benefit, and if the loan is not repaid, the policy could lapse. Withdrawals from the cash value are also tax-free up to the amount of premiums paid into the policy. However, withdrawals can reduce the death benefit and may cause the policy to lapse if too much is withdrawn. Surrendering the policy means giving up the death benefit in exchange for the cash value. This option is typically considered a last resort.
Types of Life Insurance Policies with Cash Value
As mentioned earlier, not all life insurance policies have a cash value component. The two main types of life insurance policies that do are whole life insurance and universal life insurance.
Whole life insurance policies provide a guaranteed death benefit, a guaranteed cash value growth rate, and level premiums for the life of the policy. The cash value in a whole life insurance policy is guaranteed to grow over time and can be accessed through loans, withdrawals, or surrendering the policy.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides coverage for the entire lifetime of the insured. The policy pays a death benefit to the beneficiaries upon the death of the insured, and it also has a cash value component that grows over time.
The premiums for a whole life insurance policy are typically higher than for a term life insurance policy, but they remain level for the life of the policy. The cash value in a whole life insurance policy grows at a guaranteed rate, and the policyholder can access the cash value through loans, withdrawals, or surrendering the policy.
Universal Life Insurance
Universal life insurance is another type of permanent life insurance that provides a death benefit and a cash value component. However, universal life insurance offers more flexibility than whole life insurance. The policyholder can adjust the premium and death benefit amounts within certain limits, and the cash value can grow based on the performance of an investment portfolio chosen by the policyholder.
The cash value in a universal life insurance policy can be accessed through loans, withdrawals, or surrendering the policy. However, because the cash value is tied to the performance of an investment portfolio, it can fluctuate and is not guaranteed.
Advantages and Disadvantages of Cash Value
There are several advantages to having a cash value component in a life insurance policy. One of the main advantages is the ability to access the cash value during the policyholder's lifetime. This can provide a source of funds for emergencies, retirement, or other financial needs.
Another advantage is the tax-deferred growth of the cash value. This means that the policyholder does not have to pay taxes on the gains each year, which can allow the cash value to grow more quickly. However, taxes may be due when the cash value is accessed.
Advantages
The cash value in a life insurance policy can serve as a powerful financial tool. It can provide a source of tax-deferred savings that can be accessed during the policyholder's lifetime. This can be particularly beneficial for individuals who have maxed out their other tax-advantaged retirement savings options.
Another advantage of the cash value is the flexibility it offers. Policyholders can use the cash value to pay premiums, take out loans, or even surrender the policy for the cash value. This can provide financial flexibility in times of need.
Disadvantages
While the cash value in a life insurance policy offers several advantages, there are also some disadvantages to consider. One of the main disadvantages is the cost. Life insurance policies with a cash value component typically have higher premiums than term life insurance policies. This is because a portion of the premium goes towards building the cash value.
Another disadvantage is the potential for the policy to lapse if the cash value is not managed properly. If the policyholder takes out too many loans or makes too many withdrawals from the cash value, the policy could lapse, leaving the policyholder without coverage.
Cash Value and Life Insurance in Canada: Conclusion
The concept of cash value in life insurance policies is a complex one, but understanding it is crucial for anyone considering a permanent life insurance policy. The cash value offers a living benefit that can provide financial flexibility during the policyholder's lifetime, but it also comes with risks and costs that should be carefully considered.
As with any financial decision, it's important to consult with a financial advisor or insurance professional before deciding on a life insurance policy. They can help you understand the implications of the cash value and how it fits into your overall financial plan.
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Life Insurance Need Not Be Complicated
Here are answers to frequently asked questions...
No, the only thing you will ever pay is a premium to the insurance company that provides the life insurance policy for you. We provide you quotes and advice on best options for your situation.
Yes, we have access to various discounts based on your health and the amount of life insurance you purchase. For example if you've never smoked in your life and are buying more than $1 million in life insurance
Rates are based on your age, health history, smoking status, gender and income. The insurance company also compares and makes assessments based on similar individuals with the same profile like age, gender, smoker status. Unlike workplace or association rates which are cheaper and based on you working at a particular company, being associate with an affinity group or the claims of the whole group i.e. your rate is affected by someone who smokes even if you don't smoke, or if you never claim and other claim multiple times, for example.
We simplify the process knowing how busy life gets. The first step is simply to request your quotes and getting a sense of the cost and coverage available. Next, we compare the policy options and other riders like guaranteed insurability and discuss what makes sense for you and answer your questions. Lastly, you apply and buy risk-free.
We are an independent life insurance broker, meaning that we do not have an affiliation with any one Canadian life insurance company. We are looking out for your best interests as we don’t have to meet any requirements to do business with any specific company. We actually get a finders fee from these insurance companies and they are all the same, so we don’t have any financial conflict of interest either.
In most cases, it can take between 2 weeks and 1 month from beginning to end. A lot of the time may depend on follow up information required by the insurance company. In our experience 1 month is usually a standard timeframe. Sometimes, depending on the amount you apply for and your age, for example children's life insurance or no medical, the approval is instant.
Underwriting is where the insurance company verifies your information that you submitted on the application your complete with us and gathers additional details such as health history, travel, and personal history to determine the best rate possible.
Any type of life insurance is great especially if you suddenly pass unexpectedly. However, just like getting a company car allowance, you only have it for as long as you work for that company because it's a benefit or "perk" of working there. When you leave you lose that perk. You are also limited to 2 or 3 times your salary which may not be enough. More importantly, how many times have you changed or will potentially change jobs?
When you buy your own personal private insurance you don't worry about losing it if you change jobs or your health changes.
As the name suggests, the AD & D policy will only pay if your death is caused by an accidental death or dismemberment of a body part. Personal private life insurance will pay regardless of the cause with the only exception being cases such as suicide.