Having an insurance policy in place can provide your family with financial assistance in the event that you pass away. This is especially important if you still have a mortgage to pay and children in the house who depend on you to cover life’s biggest expenses.
However, there are many different types of life insurance policies available, including those that serve as a form of investment.
In particular, cash value insurance policies offer both a death benefit for your beneficiaries and a cash value component that earns a fixed return through investments.
In essence, these policies can serve as both an insurance policy and a wealth-building investment vehicle.
Let’s dig a little deeper into cash life insurance policies to help you determine if this is the right type of insurance product for you.
Key Points
- Cash value life insurance is a type of permanent policy that includes lifetime coverage with a savings component.
- Types of life insurance with cash value include whole, universal, variable, and variable universal life insurance.
- Part of your premiums go towards the insurance coverage, and another part goes into a cash value account.
- The cash value of your policy grows over time at a specific interest rate, depending on the policy.
What Is Cash Value Life Insurance In Canada?
Cash value life insurance covers you for your entire life. It features both a death benefit component and a cash value component. As such, this type of policy can serve as a form of savings account.
The value of the policy will depend on the exact type of policy you buy and the rate of return promised.
You can even use this policy to borrow against once you have accumulated enough cash value. This is where the “be your own bank” strategy comes from.
Otherwise, you can use the funds withdrawn to pay for large expenses, save and invest for retirement, or even put toward your premiums. You may also cash in the policy and surrender it.
Types Of Life Insurance With Cash Value In Canada
There are a few variations of a cash-value life insurance policy, including the following:
Whole Life Insurance
Whole life insurance is the most basic type of permanent life insurance. It is guaranteed to remain in effect for your entire life. The cash value component of this policy increases at a fixed rate of return.
Universal Life Insurance
Also lasting your entire life, a universal life insurance policy features a savings account that is tied to a stock index like the S&P 500 and earns interest according to the current market rate. However, the returns earned can fluctuate over time.
Variable Life Insurance
Variable life insurance features a portfolio of stocks, bonds, and mutual funds that are chosen based on your appetite for risk. The cash value is invested into these accounts and is managed by your insurance provider. While variable life insurance offers the highest potential return, it’s also the riskiest.
Variable Universal Life Insurance
This insurance policy is a hybrid of both universal and variable life insurance and features flexible premiums. The cash value of the policy can be invested in an investment portfolio, and your coverage can be adjusted as required.
How Does Cash Value Life Insurance Work In Canada?
Every time you pay your premiums, the funds are divided and put toward both your death benefit and the cash value of the policy. Whatever goes toward the cash value is put in an investment account that grows tax-deferred.
During the first few years, a bigger portion of the premiums goes toward the cash value. And in the later years, a larger percentage goes towards your death benefit, since the cost of insurance will go up as you get older.
A cash-value life insurance policy can therefore help you both protect your loved ones through a death benefit while helping you build wealth over time.
What Is The Difference Between Cash Value And Death Benefit?
There are key differences between cash value and the death benefit:
| Cash Value | Death Benefit | |
| Purpose | Serves as a savings and investment component | Provides financial protection to policy beneficiaries |
| Availability | Available during the policyholder’s life | Paid out when the policyholder passes away |
| Growth | Cash value grows over time, potentially earning interest or investment returns | Usually, a set amount is determined at the time the policy is purchased (though it can be reduced if you withdraw some cash value) |
Pros And Cons Of Cash Value Life Insurance
Before buying into a cash-value life insurance policy, consider weighing the perks and drawbacks first.
Pros Of Cash Value Life Insurance
The following are some notable advantages of a cash value life insurance policy:
- Death Benefit. As long as you keep up with your premiums, your beneficiaries will always be financially protected when you pass away.
- Fixed Premiums. The premiums you pay will stay the same as long as the policy is in effect, making payments predictable and easy to fit into your budget.
- Cash Value May Cover Premiums. Depending on how much your cash value grows and what you decide to use the earnings for, the accumulated cash value may eventually be high enough to cover the premiums.
- Asset Of Value. Your policy’s cash value will grow over time as you pay your premiums, which can be used in the future for other expenses or to cash out.
- Dividend Payouts. Some cash value life insurance policies pay dividends, which can act as a type of regular income.
- Tax Perks. The cash value of your policy will grow tax-deferred.
Cons Of Cash Value Life Insurance
While there are several benefits of cash value life insurance, there are also a couple of drawbacks to consider:
- Higher Premiums. Cash value life insurance policies usually have higher premiums compared to term insurance with the same death benefit amount.
- Complex. These types of policies are more complex than other straightforward policies like basic whole life insurance or term life insurance policies.
- Lower Returns. The investment component often provides lower returns compared to what you could earn through other investment vehicles like mutual funds or ETFs.
- Surrender Charges. If you cancel the policy early, you may face substantial surrender charges, which can significantly reduce your cash value.
Calculating Your Life Insurance Expected Cash Value
If you want to know what the cash value of your life insurance policy is, or the amount of money that you’ll get if you cash out the policy, you will need to determine the cash surrender value.
This is the cash value of the accumulated investment portion of your policy, which you will receive if you cancel your policy.
It’s important to remember that your beneficiaries will no longer receive the death benefit if you cash out. Instead, you will only get the cash surrender value of your policy.
Accumulating cash value in a life insurance policy takes place slowly over time. The longer the policy is in effect and your premiums are paid, the more your money can grow.
The cash value of your policy is determined by the amount you have paid into your policy, how the market has performed since your policy took effect, and how much your insurance provider charges in fees.
Your insurance provider will be able to tell you what the exact cash surrender value of your policy is.
Ways To Access Your Cash Value
There are a handful of ways to access the cash value component of your policy:
Borrow Against It
Like a conventional loan, you can borrow against the cash value of your life insurance policy. This can be especially useful if you have a poor credit score and are unable to secure a traditional personal loan.
In this case, you can borrow against the cash value of your policy like a regular loan.This scenario makes more sense if your policy has a high cash value and you have a lucrative investment opportunity to take advantage of.
Get Paid In Dividends
You may have the option to have your cash value policy pay you dividends from the earnings your investment makes. If your insurance provider pays a dividend to policyholders – which is money left over from the premiums collected – you can tap into your cash value this way.
Transfer It To The Death Benefit
If you are approaching retirement and have a very high cash value attached to your life insurance, you may want to consider trading the cash value to boost your death benefit. By doing so, your beneficiaries will receive a bigger benefit.
Surrender Your Policy
Your last option would be to cash out your policy and surrender it. After your policy has accumulated enough cash value, it can be cancelled and the surrender value can be taken in a cash payment. It should be noted that if you surrender the policy, you will no longer be insured.
Final Thoughts
With a life insurance policy in place, you can rest assured knowing that your loved ones are financially protected in the event of your death. And with cash value life insurance, you can use your policy as an investment as well to help you grow your wealth.
