Cash Value Insurance
combines death benefits with a cash value accumulation feature. The buyer of a cash value policy pays more in the early years than for term insurance, but the premium not needed to pay for the cost of the death benefit accumulates with interest within the policy. If the policy is surrendered before the insured person dies, there may be a cash value paid to the owner, less any outstanding loans placed against the policy.
Make sure the agent provides you with the
method by which the cash value is determined and
that they obtain this information based on the policy’s
guaranteed value. It is not a good idea to buy a cash
value life insurance policy if you plan to surrender early
due to substantial surrender penalties. If all premiums
are paid, cash value insurance usually lasts for the
entire life of a person and pays death benefits to the
beneficiaries named in the policy upon the death of the
insured. The cash value can be used as loan collateral
for borrowing funds at the interest rate specified in thepolicy. Any outstanding loans are deducted from policy proceeds at death or at policy surrender. Some of these products may enjoy tax advantages while they remain active. Therefore, a policy lapse or surrender may create a taxable event and may generate a Form 1099. Form 1099s are sent to the IRS for tax purposes; be sure to check with your tax advisor.