How Does Your Life Insurance Build Cash Value?
Many people understand the importance of life insurance. However, very few people understand how life insurance works. To add insult to injury, even fewer understand how a life insurance builds cash value.
What Is Cash Value?
Cash value is a key component to permanent life insurance. On face value, it is a tax-sheltered investment. Tax-sheltered investments are attractive because you can earn interest without the need to pay taxes on the money.
Policies that include cash values provide policy owners with other benefits besides tax-free money. As a policy owner, you can borrow from your cash value and pay your life insurance premiums from the balance of your cash value. With the option to pay your monthly premium, you can essentially protect …show more content…
Your life insurance company takes a portion of your payment and credits your cash value account. Of course, the remaining premium payment pays for your death benefit and costs your insurance company incurs for issuing the policy.
Factors that Affect Your Cash Value
Now that you know that paying your monthly premium affects your cash value balance, it’s important to understand other factors that affect it. The following are a few factors that affect how fast your cash value grows.
How old you are
Although you may be paying the same premium each month, your insurance company will likely not allocate the same amount of money to your cash value balance each year. Since the cost of providing your insurance increases each year, the money added to your cash value balance will decrease each year.
The type of insurance you have
There are different types of permanent life insurance. As a result, the type of life insurance you have affects how your cash value grows. For instance, with a universal life policy, your cash value grows based on how profitable your investment is within the policy.
The amount of your death
Many people understand the importance of life insurance. However, very few people understand how life insurance works. To add insult to injury, even fewer understand how a life insurance builds cash value.
What Is Cash Value?
Cash value is a key component to permanent life insurance. On face value, it is a tax-sheltered investment. Tax-sheltered investments are attractive because you can earn interest without the need to pay taxes on the money.
Policies that include cash values provide policy owners with other benefits besides tax-free money. As a policy owner, you can borrow from your cash value and pay your life insurance premiums from the balance of your cash value. With the option to pay your monthly premium, you can essentially protect …show more content…
Your life insurance company takes a portion of your payment and credits your cash value account. Of course, the remaining premium payment pays for your death benefit and costs your insurance company incurs for issuing the policy.
Factors that Affect Your Cash Value
Now that you know that paying your monthly premium affects your cash value balance, it’s important to understand other factors that affect it. The following are a few factors that affect how fast your cash value grows.
How old you are
Although you may be paying the same premium each month, your insurance company will likely not allocate the same amount of money to your cash value balance each year. Since the cost of providing your insurance increases each year, the money added to your cash value balance will decrease each year.
The type of insurance you have
There are different types of permanent life insurance. As a result, the type of life insurance you have affects how your cash value grows. For instance, with a universal life policy, your cash value grows based on how profitable your investment is within the policy.
The amount of your death