Cash value policies, termed universal life policies, are based upon the cash value - the amount of premiums paid plus interest over the cost of insurance. It is a fairly complex financial instrument and is not properly characterized as an investment. So long as the premium plus interest exceeds the cost of insurance, the policy will maintain or increase in cash value. Policy holders have access to the cash value for loan or redemption during the life of the policy pursuant to contract restrictions. There is a risk that premiums plus interest will be insufficient to cover the cost of insurance, and the policy could lapse (though this is more of a problem if the insurance contract is entered into during a period of high interest rates, followed by declining interest rates, and is dependent upon the terms of the contract).
Non-cash value, or term life policies, provide coverage so long as the premium is paid, and are typically cheaper. They have no cash value, so you cannot terminate the policy and receive and cash value - the premium covers only the cost of insurance.
For more information, consult your agent or review ample resources available on the internet.
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Universal life policies are just one type of cash value policy and are probably the riskiest since they are primarily focused on investments, stocks and bonds. A safer cash value policy is called a “whole life policy.“ In this version the insurance company invests the premium proceeds; the excess of cash over the cost of the life insurance accumulates as cash value, which throws off dividends. The owner of the policy has several options: 1. Use the dividend to pay premiums after a few years of growth; 2. Borrow part of the cash value; 3. Take the dividend in cash; 4. Reinvest it in additional paid up life insurance (which increases cash value); 5. Use it to repay policy loans. Highly rated insurance companies are quite conservative and usually do not have the risk of decreasing cash value, while generating a safe return. If you need life insurance and can afford it, cash value life insurance can be a valuable part of your investment portfolio with very low beta, leaving you free to invest in a mix of other riskier high beta securities. This can also be part of a useful tax sheltered executive compensation device in the form of split dollar life insurance. Many people in the early phase of their careers with a wife and kids need more life insurance than they can afford, so they should buy term insurance with maximum life coverage for the buck, although it will expire worthless in 10 or 20 years. Consult a good agent for a quality company.
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(Bryant) Keith Martin
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