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PRESIDENT
Timothy Doty
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Cash value insurance is permanent life insurance because it provides coverage for the policyholder’s life. Traditionally, cash value life insurance has higher premiums than term life insurance because of the cash value element. Most cash value life insurance policies require a fixed-level premium payment, of which a portion is allocated to the cost of insurance and the remaining deposited into a cash value account.2
The cash value of life insurance earns a modest rate of interest, with taxes deferred on the accumulated earnings. Thus, the cash value of life insurance will increase over time. As the life insurance cash value increases, the insurance company’s risk decreases, because the accumulated cash value offsets part of the insurer’s liability.
Taxes are deferred on earnings until withdrawn from the policy and distributed. Once distributed, earnings are taxable at the policyholder’s standard tax rate. Some policies allow for unlimited withdrawals, while others restrict how many draws can be taken during a term or calendar year.
Most cash value life insurance arrangements allow for loans from the cash value. Much as with any other loan, the issuer will charge interest on the outstanding principal.
The outstanding loan amount will reduce the death benefit dollar for dollar in the event of the death of the policyholder before the full repayment of the loan. Some insurers require the repayment of loan interest, and, if unpaid, they may deduct the interest from the remaining cash value.3