Life insurance is usually considered a financial safety net, a one-time payout designed to protect your family’s financial future. That’s generally the case where term insurance is concerned: It pays out death benefits to beneficiaries when you pass away. Cash value life insurance is a much more dynamic tool, because it can grow within your policy and provides an accessible source of cash while you’re still living. Unlike term life, cash value does not terminate beyond a certain number of years, and represents a potentially important financial resource.
Keep in mind that life insurance can offer some qualification hurdles to senior citizens who are 75 or older, as well as those who are in less-than-optimal health. If you’re having trouble obtaining a life insurance plan, an option worth exploring is final expense life insurance, which typically offers lower premiums to seniors of all ages, no matter their health. Depending on your unique plan, you can opt for funds to cover only your cremation/burial and all related service expenses, or also any outstanding bills after you pass away, such as estate and legal fees.
So, if you believe that life insurance is an unnecessary financial burden, take a closer look at the many financial advantages a cash value policy can confer.
Tax advantage
A cash value policy accumulates tax-free within your policy. That means death benefits are paid out free of federal income taxes, and you are able to access cash values tax-free for the life of the policy. Cash distributions are not factored into Affordable Care Act taxes or taxes on Social Security benefits.
Financial protections
Because insurance death benefits are intended to protect the financial security of the policyholder’s family, many states provide insurance cash value and death benefits protection from creditors. States (with some variability) ensure that benefits are protected even when creditors are owed significant amounts by a deceased individual’s estate. In this way, the intent of a cash value life insurance policy is preserved so that beneficiaries have what they need to maintain their quality of life after a loved one’s death.
Cash access opportunities
The great thing about a cash value policy is that you can make partial withdrawals, cash in your policy or trade your policy for an annuity or long-term care policy. The financial flexibility inherent in such policies extends to other areas as well. A cash value policy is not classified as an asset when it comes to college financial aid. Furthermore, your insurer will pay all or part of the premium if you are disabled as long as the policy has a waiver of premium rider.
Liquidity
A policyholder’s death can cause liquidity problems for family estates and business interests. Where an especially large estate is concerned, exorbitant costs may require family to sell major assets, a significant problem if the family is dependent on the income from an estate or business. Tax-free benefits can be applied to settlement expenses involved in estate taxes. Without such flexibility, assets meant to be preserved for younger family members may be lost without sufficient liquidity.
An insurance policy can also meet liquidity needs during the transitional period after a business owner or part-owner dies. In such a situation, the company’s revenues may be substantially affected and cash flow seriously impeded until ownership issues have been settled. Cash value liquidity also allows the company to buy out the family of a deceased partner or owner.
Selling a policy
Liquidity can also be a problem for families, particularly when cash is needed to pay for medical expenses or when living expenses are in short supply. Policyholders who have a serious health condition and a standing universal, whole or convertible term policy worth at least $100,000 can sell their policy. It’s a valuable resource at a time when families may have no other recourse or source of support. Find out more about life insurance settlements here.
Families are often unaware of the financial flexibility and protection that a cash value life insurance policy can provide. Consequently, they may decide not to take out a policy or choose to seek other means of ensuring their financial protection. However, few such options offer so many tax-free benefits or so much flexibility.
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About the author:
My name is Sara Bailey, and I’m a widow.
Like many people who have lost the love of their life, I never in a million years thought I’d be here. On my 40th birthday — which I spent with my husband and our two kids bowling, devouring cupcakes, and laughing more than I ever thought was possible — I never dreamed that by my 41st, I’d be a grieving single mom raising a son and daughter on her own. But here I am, and with each passing day, I get a little stronger, and life gets a little easier.
