Many people understand the importance of life insurance. However, life insurance is a very complex type of coverage, and very few people understand how it works. Even fewer understand how a life insurance policy builds cash value over time.
What is Cash Value?
Cash value is a key component to many permanent life insurance policies. On face value, it is a tax-sheltered investment. Tax-sheltered investments are attractive because you can earn interest without the need to pay taxes on the money.
Policies that include cash values provide policy owners with other benefits as well. As a policy owner, you can borrow from your cash value and pay your life insurance premiums from the balance of your cash value. With the option to pay your monthly premium in this manner, you can essentially protect your policy from cancellation if you ever experience a financial hardship.
How Does Your Cash Value Grow?
In general, your cash value grows when you make your premium payments. Your life insurance provider takes a portion of your payment and credits your cash value account. Of course, the remaining premium payment pays for your death benefit and costs your insurance provider incurs for issuing the policy.
Factors that Affect Your Cash Value
Now that you know that paying your monthly premium affects your cash value balance, it’s important to understand other factors that affect it. The following are a few factors that affect how fast your cash value grows.
· Your age: Although you may be paying the same premium each month, your insurance company will likely not allocate the same amount of money to your cash value balance each year. Since the cost of providing your insurance increases each year, the money added to your cash value balance may decrease each year.
· Type of insurance: There are different types of permanent life insurance. As a result, the type of life insurance you have affects how your cash value grows. For instance, with a universal life policy, your cash value grows based on how profitable your investment is within the policy. Your independent insurance agent can provide additional details.
· Death benefit value: The death benefit value you select directly affects your cash value balance. If you decide to increase your death benefit, then you could potentially decrease the amount of money in your cash value account.
Your cash value balance is a nice feature of your permanent life insurance policy. Depending on the type of insurance you have, you may be able to pay more than your monthly premium and watch your cash value grow. Although having extra money in your hand is intriguing, it’s important that you speak with your insurance agent before making changes.
Protect your family’s future. Call Insurance Agent2000 at (925) 827-0510 for more information on Pleasant Hill life insurance.