Civil Service Life Insurance: Cash Value And Benefits Explained

Civil Service Life Insurance is a type of permanent life insurance that offers coverage for the entire life of the policyholder. It includes a cash value feature, which allows the policyholder to accumulate funds that can be accessed during their lifetime. The cash value component typically grows tax-deferred, and the policyholder can borrow or withdraw funds for various purposes, such as retirement, paying down a mortgage, or covering unexpected expenses. However, accessing the cash value may reduce the available cash surrender value and the death benefit. Civil Service Life Insurance provides lifelong coverage, flexible access to funds, and reasonable premiums, making it a valuable option for those seeking both insurance protection and a savings component.

What is cash value life insurance?

Cash value life insurance is a form of permanent life insurance that features a cash value savings component. This means that the policyholder can borrow or withdraw money from the policy or use it to pay premiums. Cash value life insurance policies do not expire after a specific number of years, unlike term life insurance.

Permanent life insurance policies such as whole life, universal life, variable life, and indexed universal life insurance can accumulate cash value over time. A portion of each premium payment is allocated to the cost of insurance, and the remainder is deposited into a cash value account. This cash value account earns interest, and taxes on the accumulated earnings are deferred. As the cash value increases, the insurance company's risk decreases because the accumulated cash value offsets part of the insurer's liability.

There are several ways to access the cash value of a life insurance policy. Partial withdrawals are usually allowed, but these reduce the death benefit. Some policies allow unlimited withdrawals, while others restrict the number of withdrawals per term or calendar year. Policyholders can also take out loans against the cash value, but these must be repaid with interest. If the loan is not repaid before the policyholder's death, the outstanding amount will be subtracted from the death benefit. Additionally, the cash value can be used to pay policy premiums.

Cash value life insurance is typically more expensive than term life insurance because of the cash value element. It is important to note that accessing the cash value may reduce the death benefit and could result in a penalty if withdrawn before a certain period.

What types of life insurance policies build cash value?

Permanent life insurance policies such as whole life, universal life, variable life, and indexed universal life insurance can accumulate cash value over time.

Whole Life Insurance

Whole life insurance is a type of permanent insurance that lasts the entire life of the policyholder, with premiums being paid regularly. It is believed that whole life is one of the most popular choices in the life insurance market. The cash value of whole life insurance can still grow with potential tax savings, and the death benefit is guaranteed as long as the premiums are paid. The premiums in this type of plan are usually fixed.

Universal Life Insurance

Universal life insurance and whole life insurance have a few similarities, but one key difference is that many universal life insurance plans allow you to change the value of premium payments, giving you more adjustability. With universal life insurance, you can scale the death benefit up or down depending on your unique circumstances. The cash value of a universal life insurance policy can be used to pay for the premiums or other expenses as needed.

Variable Life Insurance

Variable life insurance has many variables. In this type of plan, you have greater access to investment tools like cash value. This type of plan tends to involve more risk as the cash value will grow or diminish depending on how the investments chosen are doing. This may be a great route if you have experience with investment accounts, are comfortable taking risks, and aim to grow your cash value over time.

Indexed Universal Life Insurance

An indexed universal life insurance plan has a greater relationship with the stock market, as this is what is used to determine growth. The rate of return on the cash value within the life insurance policy is directly impacted by how the chosen index performs. While there is a certain level of risk involved in an indexed universal life insurance plan, you can typically still secure a guaranteed minimum interest rate.

How does your policy earn cash value over time?

How your policy earns cash value over time depends on the type of permanent life insurance policy you have.

Whole Life Insurance

Whole life insurance offers a fixed monthly premium, a fixed rate of growth for your cash value and a guaranteed death benefit amount. Whole life insurance policies guarantee a fixed rate of return on the cash value, and policyholders with mutual companies may earn additional dividends.

Universal Life Insurance

Universal life insurance has flexible interest rates with a floor to protect against significant market losses. Many universal life insurance plans allow you to change the value of premium payments.

Variable Universal Life Insurance

With variable universal life insurance, you can choose where to invest your cash value, and its growth will depend on how well your investments perform. The cash value of a variable policy could build much more quickly than that of a whole life policy, but it could also lose value if your investments perform poorly.

Indexed Universal Life Insurance

Indexed universal life insurance connects cash value growth to gains and losses in an index like the S&P 500. The cash value can decrease if the indexes fall.

Variable Life Insurance

Variable life insurance has many variables. In this type of plan, you have greater access to investment tools, like cash value. This type of plan tends to involve more risk, as the cash value will grow or diminish depending on how the investments chosen are doing.

How the Cash Value Grows

A portion of every premium payment goes into your policy’s cash value account. From there, how your cash value grows depends on the type of insurance policy you have. Some policies have a fixed interest rate, which ensures the cash value grows at a steady pace. With other policies, its growth depends on the performance of investment options and market conditions.

What can you do with the cash?

Cash value life insurance policies offer a lot of flexibility when it comes to utilising the cash value. Here are some of the ways in which you can use the cash:

Partial Withdrawals

You can make partial withdrawals from the cash value of your life insurance policy. However, it is important to note that if the withdrawn amount is not repaid, it will reduce the life insurance death benefit paid to your beneficiaries upon your death. Withdrawals are generally tax-free if they do not exceed the total amount of premiums paid.

Borrowing

You can borrow against the cash value of your life insurance policy, providing you with funds that can be used for any purpose, such as an emergency or supplementing retirement income. You will have to repay the loan with interest, and if it is not repaid before your death, the outstanding loan amount will be subtracted from the death benefit.

Surrender the Policy

You can withdraw all the cash value and surrender your life insurance policy, but this will result in the termination of your life insurance coverage. Surrendering the policy in the early years may also incur a surrender fee.

Pay Premiums or Insurance Costs

Once your cash value reaches a sufficient level, you can use it to pay your life insurance premiums or the cost of maintaining your policy. This can be especially helpful if you are struggling to make payments and want to keep your life insurance policy in force.

Long-Term Savings Needs

Cash value life insurance can be used for long-term savings needs such as retirement planning, paying off a mortgage, or covering unforeseen emergencies. The cash value can serve as a source of funds to meet these financial goals.

Down Payment on a Home

The cash value can be borrowed against to cover significant expenses, such as a down payment on a home. This can provide you with the necessary funds to purchase a home without dipping into your other savings or investments.

Education Expenses

The cash value can be used to pay for your children's education, helping to cover the cost of college or university. This can be a significant benefit, as education costs can be high, and the cash value can provide a source of funds to ensure your children's education is funded.

Supplement Retirement Income

Cash value life insurance can enhance your retirement income by providing a source of funds that you can access later in life as your insurance needs decrease. The cash value can be accessed tax-free in most cases, providing a valuable source of income during retirement.

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

Cash value life insurance is a type of permanent life insurance that includes a cash value feature. This means that the policyholder can withdraw or borrow against the cash value for long-term savings needs. The cash value component serves as a living benefit for policyholders, and it can be used for various purposes during the insured's lifetime.

Pros of Cash Value Life Insurance

• Policies earn money that can be withdrawn or borrowed against during the lifetime of the policyholder.
• Policies typically last a lifetime.
• The cash value can be used for several purposes, such as paying for a child's college, covering a medical emergency, or supplementing retirement income.
• The cash value grows tax-deferred, and there are no annual contribution limits.
• You can borrow against the cash value, often on a tax-free basis.
• The cash value can be used to pay premiums or the cost of insurance.

Cons of Cash Value Life Insurance

• Cash value policies tend to have higher premiums than term life insurance.
• Managing policies often requires a hands-on approach.
• Cash value loans have relatively low net interest rates.
• Unpaid loans can reduce the death benefit paid to beneficiaries.
• It can take years to build up enough cash value to access the money within the policy.
• Cash value is not paid to beneficiaries in most cases and typically reverts to the life insurance company upon the death of the policyholder.
• If you borrow too much against the policy, it may lapse.
• Taxes may apply if you withdraw cash value or take the surrender value and terminate the policy.

Overall, cash value life insurance can be a good option for those who want life insurance and a way to build future savings, especially for retirement. However, it is important to carefully consider the pros and cons before deciding if this type of policy is right for your needs and financial goals.

Frequently asked questions