One of the most widely used tools in financing real estate plans is a term or permanent life insurance. Buying a life insurance policy gives an individual or spouse the ability to transfer the financial risk of loss of income or estate tax burden to the insurance company in exchange for premiums paid.
The life insurance carrier offers two main benefits to the insured individual when the transfer of risk occurs: death benefit proceeds and cash value savings. The death benefit is the amount payable to the insured individual beneficiary as soon as the insured person dies, and the remaining cash value is the compulsory savings component available to the insured person while they are still alive.
Key Takeaway
- Life insurance policies offer both death benefits for the beneficiary after the insured person dies and a cash value saving component that can be used by the policyholder during life.
- The death benefit is a tax-free payment to a beneficiary named by the insured after the insured dies; benefits are payable provided the policy is active and all premiums have been paid.
- Permanent life insurance plans have a cash value saving component; cash value is the balance of money paid in premiums after insurance costs and other fees are deducted.
- Cash value is available to the insured while they are still alive; to access cash, they can choose to hand over part of the policy or take out a policy loan.
- Any portion of the cash value that has not been used at the time of the policyholder’s death will be forfeited to the insurance company unless the rider has been purchased to allow it to be added to the death benefit.
Life Insurance Death Benefit
A person usually buys a life insurance policy to get death benefits that have to be paid to the insured victim when they are no longer alive. The insurance company offers a total death benefit for any amount deemed appropriate by the insured as long as the policy is in force and the premium is paid. The insurance company pays the death benefit as a tax-free transfer to the named beneficiary once the carrier is notified of the insured’s death and the beneficiary can use the funds without restriction.
The cash value of a life insurance policy remains increased tax-deferred and can eventually be used by policyholders to pay monthly premiums.
Life Insurance Cash Value
With permanent life insurance policies such as life or universal, the insured individual can accrue savings in the cash value of the policy. The cash value of a life insurance policy is equal to the number of premiums paid fewer insurance costs and other charges assessed by the carrier. The cash value balance may also vary based on the underlying investment for which the balance is allocated. Unlike death benefits, the balance of the cash value is available to the insured or the owner of a life insurance policy while they are still alive, either through the partial surrender of the policy or through a policy loan. Any remaining cash value after the insured dies is forfeited to the insurance company unless a particular rider has been purchased to enable it to be added to the death benefit.
Advisor Insight
The death benefit of a life insurance policy represents the upfront amount that will be paid tax-free to the beneficiary of the policy when the insured person dies. So, if you buy a policy with a 1 million dollar death benefit, your beneficiary will receive $ 1 million after your death.
The cash value of a policy represents the portion of savings (or investments, depending on the type of policy you have) that is funded by a portion of your insurance premiums. This cash value grows on a tax-deferred basis and can eventually be used to pay premiums; it can also be issued tax-free as a loan. You should discuss doing so with your insurance carrier, though: if you make too many withdrawals, you may inadvertently cause the policy to expire.