cash-value life insurance

cash-value life insurance

A type of life insurance in which part of the premium is used to provide death benefits and the remainder is available to earn interest. Thus, cash-value life insurance is both a protection plan and a savings plan. This insurance entails a significantly higher premium than protection-only insurance and, depending on the issuer and the policy, may pay a relatively small return on savings compared with other investments. Also called permanent insurance, whole life insurance. Compare term insurance.

Is cash-value life insurance a good investment? Why? For whom?

For many years this was a lousy investment pushed by excellent sales forces, often using deceptive practices to mask how poor it really was. In recent years the situation has changed, with the widespread offering by major companies of universal life and interest-sensitive whole life, both of which pay competitive interest rates on the cash-value portion of the policy. These policies can be an appropriateeven an excellentinvestment because of the lack of federal taxation on the internal earnings of the policies. And if they are held until death, no tax is ever paid on these earnings. If the owner ever needs funds, he or she can borrow from the policy rather than cashing it in, thereby continuing to avoid taxation. TIP: Cash-value life insurance is an investment and should be treated as such. If you just need protection, buy term; 10- or 20-year level premium term policies are available.

Thomas J. McAllister, CFP, McAllister Financial Planning, Carmel, IN