Whole Life Insurance: Pros and Cons of Cash Value Component

BOSTON, Jan. 6, 2011 /PRNewswire/ -- As banks continue tightening their lending practices as a reaction to the current economy, more individuals are turning to the cash value component of their permanent life insurance policy to meet their needs. This is a valuable source of funds for an emergency, an investment or a college education. However, there are some drawbacks to using this option. Here are the pros and cons of using these funds.

The cash value component is one of the most appealing qualities of a whole life insurance policy. This is an attached account to the policy, which the individual holder can fund with an amount of their premium payment. This is done so on a tax-deferred basis. As this amount grows over the years, it can be used for other investments or borrowed against for personal needs. If the entire plan is voided, the individual can still gain some or all of the cash value back for their use.

This aspect of a whole life insurance policy also provides beneficial tax benefits. There is no tax on the interest accumulated on the cash value annually. This is true as long as the dividends do not surpass the premium. Generally, benefits are not taxed as income, but they could be subject to gift taxes or estate taxes. To lower taxes further, the cash value may also be tied to the insurance policy. Many experts would recommend guidance from a financial professional as these tax advantages can be complex.

When choosing a life insurance company, an individual should inquire about when they are able to borrow from the cash value and what the penalties are. Some companies will require people to wait for several years to pass. And when they do borrow, the interest and penalties are set by the company. These can vary and should be known before borrowing. If the individual holder still owes funds from the account at the time of their death, this will be deducted from the cash value or the total benefit amount, which would have otherwise gone to the beneficiaries. Individuals should not borrow prematurely or if they are not able to pay the money back without large risks.

About WholeLifeInsurance.net:

WholeLifeInsurance.net provides a valuable resource to those interested in learning more about whole life insurance. This site also connects people with qualified and licensed providers in their local area. To learn more about the principles that define whole life policies and find out if this type of coverage is right for you, visit the website. You can also learn about savings on premiums and tips on how to choose a life insurance agent.  

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SOURCE WholeLifeInsurance.net