Cash value is often dubbed as the hidden value that a life insurance policy holds. Term insurance plans are the most commonly purchased life insurance policies because of affordable premiums, however, it is not a source of cash. Permanent life insurance policies on the other hand, have cash value which may be availed by the policy holder when the need arises. This article delves into the different aspects of cash value of a permanent life insurance policy.
Understanding Cash Value
Life insurance policies are a great way of protecting your finances. In fact, some life insurance policies also come with an additional ‘cash value’ feature. One portion of the premium paid goes into risk coverage (insurance) and the other portion goes into cash value, which acts as your savings. As the years go by, the policy ages, and the cash value earns interest. Economic surveys reveal that India’s life insurance penetration for the year 2019 was a mere 2.82%. This percentage would considerably improve if people saw insurance policies as a cash source, and investment as well.
Term plans have no cash value
As mentioned earlier, simple term insurance policies do not have cash value. Cash value is a specific feature of permanent life insurance policies. Before we get into permanent life insurance policies, and the cash value they provide, let us look at why term plans in India do not have cash value. The simple answer is that term plans are a purely risk coverage or insurance policy, no portion of the premium is set out for savings. To ensure that the policy holder gets maximum coverage, it is important that the entire premium amount is dedicated towards insurance. The premium paid towards term plans are therefore much lesser than that paid towards permanent life insurance policies. This affordability is why term plans are hugely popular in India.
Types of permanent life insurances
As discussed above, permanent life insurance policies are those that afford protection for the entire lifetime of the policy holder, and double up as a means for savings in addition to being an insurance policy. The major types of permanent life insurance policies in India are as under.
1. Whole life insurance policies
Whole life policies are the most commonly found permanent life insurance policies in India. It provides the policy holder with benefits until the end of their lifetime, and also provides policy holder with retirement benefits. There are three types of whole life insurance policies, as given below.
a) Pure whole life insurance -
Here, premiums are paid until the policy holder’s demise and benefits are received after such demise.
b) Limited payment whole life insurance -
Here, premiums are paid until a fixed period as chosen by the policy holder, the cover however, remains for life.
2. Endowment policies
It is the life insurance policy that most salaried employees in India have. These policies afford protection for a specific period of time. After the expiry of this period, the policy holder has the option to discontinue with the policy or to extend the same or receive maturity benefit. In the event that the policy holder passes away during the subsistence of the policy, the nominee receives the policy amount along with a bonus, depending on the number of years for which the policy has been in existence. The same is also received upon maturity of the endowment policy.
Advantages of permanent life insurance policies
Of the numerous benefits of permanent life insurance policies, some of the most important ones are listed below.
Protection across lifetime
Permanent life insurance policies provide financial protection for the entire lifetime of the policy holder. The cover will not be cancelled even upon diagnosis of illnesses, however critical, so long as premiums are regularly paid.
The premiums remain stable
The general notion is that premiums rise exponentially as the policy ages couldn’t be farther from the truth. The premiums remain stable across the entire duration of the policy.
Accumulate cash value
A part of the premium paid towards permanent life insurance policies is kept aside as savings (cash value) and interest is earned on this cash value as the years go by. This can be tapped into in the event of a financial emergency.
Flexibility to use cash value
Policy holders of permanent life insurance policies have the option to use the cash value and access it flexibly. It can be withdrawn, or loans may be taken against the cash value to procure emergency funds.
Avail tax deductions
The premiums paid towards your permanent life insurance policies can be availed as a tax deduction under Section 80C of the Income Tax Act, 1961. The death benefit received under these policies are also exempt from taxation under Section 10(10D) of the Income Tax Act, 1961. However, tax benefits are as per current tax laws, and are subject to change from time to time.
Here’s when to buy permanent policies
Given below is a list of situations where it is best to buy a permanent life insurance policy, over term life insurance policies.
- You are a supporting member for others in your family
- You are able to afford higher premiums
- You do not wish to constantly renew your life insurance policy
- You want the policy to act as a means of savings
- You need to make sound investments to claim tax deductions
- You want long-term protection
- You wish to set aside a corpus for the long run
What influences cash value of policies?
The following factors influence the cash value of life insurance policies.
- The duration for which the life insurance policy has been in effect
- The amount of premiums paid
- The market conditions
- Past withdrawals taken against the policy
If you want to know what the cash value of your life insurance policy is, at present, all you have to do is ask the insurance service provider.
Why use insurance as a cash source?
Using insurance policies as means to procure cash is a practice that is followed across the globe. There are many reasons why insurance is often preferred as a cash source. Some of the most commonly found reasons are given below.
Emergency medical expenses
Nobody can predict the future and health of humans. While insurance policies provide cover in the event of medical emergencies, permanent life insurance policies will help you procure cash required for the expenses that wouldn’t be so covered.
Expenses incurred after retirement
The cash value of permanent life insurance policies act as a form of corpus towards the future. You save up a portion of the premium paid, and can reap the benefits to meet expenses after retirement.
Expenses incurred for palliative care
Palliative care and hospice expenses are not always completely covered by health insurance policies. In such cases, the cash value of your permanent life insurance policy can be tapped into for money.
When the policy outlives its originally intended purpose
When your policy outlives its purpose, all the premium you’ve deposit over the years does not need to go unused, the portion of premiums that go towards cash value may be used to meet needs that may arise in the future.
As is clear from the above list, life insurance policies are preferred as a cash source mostly when unexpected emergencies or tough times arise in life. Always be prepared for these unexpected emergencies by verifying the cash value of your life insurance policy.
How to access policy cash value?
Now that you know that life insurance policies are a great investment and source of cash during emergencies, let us look at how you may access this cash value. Each policy has its own terms and conditions for how to access cash value, given below are some common ways.
By making withdrawals
The most common way in which to access cash value in life insurance policies is by making withdrawals. A portion of the premium paid is reserved as savings and earns interest over time. The cash value amassed can be withdrawn when the need arises.
By taking loans against policy
Another way through which you can access the cash value in life insurance policies is by taking out loans against the cash value of the life insurance policy. The loan value is dependant on the type of policy, but typically a loan that amounts to up to 90% of the cash value may be taken. When a life insurance policy is the collateral, the interest on loan taken is also much lower.
By surrendering life insurance policy
Surrendering one’s life insurance policy is another way in which the cash value of the policy may be accessed. This is usually a method that arises out of the inability of the policy holder to continue to pay premiums. Such financially tough times, call for surrendering of the life insurance policies, upon which, an amount lesser than the cash value is received by the policy holder.
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.