We all think of life-insurance primarily as a safety net for our families if we pass away, and that is its core purpose. But some types of life-insurance offer more than just a death benefit; certain permanent policies also include a savings component, often called ‘cash value,’ that grows over time. While typically not the most efficient way to grow wealth compared to dedicated investments, understanding this cash value feature is important for comprehensive financial planning.
A Simple Analogy to What Life-Insurance Actually Is
So, if life-insurance is much more than just a safety net for your family in case you pass away, then what exactly is it? A simple, inclusive definition would be a contract where you make regular payments, and in return, an insurance company guarantees a payment to your loved ones after you’re gone, with some types also building a cash reserve you might access later. This promise provides crucial financial protection and, depending on the policy, can offer other financial tools.
It Is Not the Best Investment – But It Is a Form of Investment
Given that its primary purpose is to serve as a safety net for your loved ones in case of your demise, it is not the best when it comes to investments. There are several other forms of funds, like TFSA or RRSP, which actually work like an investment and deal with profit or loss. But if you prioritize the death benefit and also want a component that builds cash value with certain guarantees, avoiding direct market risk, then some types of permanent life-insurance offer that specific combination.
How Can You Avail Those Parts?
So, it’s clear that life insurance can act as a form of investment if you use it that way. But how does that actually work, and how can you, the policyholder, potentially use it while you’re still alive? It’s not like a regular savings account, but there are ways:
Policy Loans: Borrowing From Yourself
Many permanent life-insurance policies allow you to borrow against the accumulated cash value. Think of it like taking a loan using the cash value as collateral.
The Upside: You generally don’t pay income tax on the loan amount (as long as the policy stays active), and you typically don’t have a fixed repayment schedule. The interest rates are often reasonable.
- The Downside: Interest does accrue on the loan. If you don’t pay it back, the outstanding loan balance (plus interest) will be deducted from the death benefit paid to your beneficiaries when you pass away. If the loan grows too large relative to the cash value, it could cause the policy to lapse. This requires careful management and understanding, often best discussed through life-insurance consulting London Ontario.
Withdrawals (Partial Surrenders): Taking Cash Out
Depending on the policy type (especially Universal Life), you might be able to withdraw a portion of the cash value directly.
The Upside: You get access to the cash without creating a loan.
- The Downside: Withdrawals permanently reduce the death benefit. Also, if you withdraw more than you’ve paid in premiums, the excess amount could be subject to income tax. This can be complex, making guidance from an insurance consultant
Policy Surrender: Cashing It All In
You generally have the option to surrender (cancel) your permanent life insurance policy entirely and receive the accumulated cash surrender value (cash value minus any surrender charges or outstanding loans).
The Upside: You get a lump sum of cash.
- The Downside: You completely lose the life insurance protection (the death benefit). Any cash value received that exceeds the total premiums paid is typically taxable. Surrender charges can also apply, especially in the early years of the policy. This is usually a last resort.
Using Dividends (Participating Policies): A Potential Bonus
Some Whole Life policies are “participating,” meaning they may pay out dividends based on the insurance company’s financial performance. Policyholders often have options for using these dividends:
Take them in cash.
- Use them to reduce premiums.
- Leave them to accumulate interest.
- Use them to buy additional “paid-up” insurance (increasing the death benefit and cash value).
Dividends are not guaranteed, but they can enhance the growth of your life insurance cash value over time.
Avail Expert Life-Insurance-Consulting Services with KMR Financial – The Best Life-Insurance Service Provider in Canada
It is clear by now that life insurance is not the best form of investment, but it can be great if used correctly. But if you are still unclear whether you should avail yourself of life insurance services in such a way or not, then you have visited the right place. At KMR Financial, our expert advisors guide you on everything about money and how to invest it, so you don’t have to face poverty even in a state of scarcity.
The best part is that we provide all the information for absolutely no money, at any time of the day, on call! Feel free to call us at 226.973.8423 to get expert guidance, and visit https://kmrfinancial.ca/ to know more.
