What are the pros and cons of life insurance with cash value?

We often refer to permanent life insurance as "life insurance with cash value" when we want to emphasize its cash value element.

Because permanent life policies have level premiums for life regardless of the fact that the mortality rate increases every year, there is an overpayment in the early years of every permanent policy. This extra money is stored in a reserve called cash value and you are entitled to its return if you decide to drop the policy.

Advantages of Life Insurance with Cash Value

• You are insured for life as long as you keep paying the premiums.
• You can choose between fixed and flexible premium payments, depending on your personal financial situation. Under a universal life policy, for instance, you have the freedom to vary the premium payments from year to year, and you can even skip a payment.
• The cash value can be borrowed in the form of a policy loan. You must repay the loan with interest; otherwise the death benefit will be reduced by the amount borrowed plus the interest.
• You can surrender the policy for its cash value or convert it to an annuity.
• The accumulating cash value is tax-deferred.
• You can add a rider to the policy, giving you the right to purchase extra life insurance without having to provide evidence of insurability.
• The long-term benefits of a permanent life insurance are excellent as the premiums are not affected by unfavorable external factors, such as a recession.

Disadvantages of Cash Value Life Insurance

• The premiums are rather high, especially when compared to term insurance. People often cannot afford to buy enough protection and are thus left under-insured.
• Premiums are higher in the first years of the contract so if you have to surrender the policy early on, you will lose a lot of money.

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