As we move forward in life in the pursuit of achieving milestones, our requirements to achieve those milestones also increases. You may find yourself in a stage where the lives of your family members are dependent on you. In such situations, you often catch yourself thinking of “how can you protect your family?”. We all have witnessed familiar situations wherein we try to find and do everything that is possible to protect our loved ones if something happens to us. Life insurance is a pivotal financial instrument that is generally opted by people as the first step in securing the life of your loved ones.
As per reports, insurance sector in India is growing rapidly, and new products are entering the market every day. Hence, it is vital to get acquainted with the nitty-gritty of the life insurance policies before buying a term plan in India. Concerning this, the ‘cash value’ is an important component of a life insurance policy to look for. This article explains all the aspects related to the cash value of term plans in India.
Understanding the cash value of a life insurance plan
Life insurance is a type of investment for protecting finances. Some insurance plans come with an extra feature called ‘cash value’. A part of the premium goes into the cash value, which is basically your savings. It earns interest and increases as the policy ages.
As per the economic survey, the insurance penetration in India is only 3.76% and lower than the world average. Therefore, insurance policies with such a savings plan would serve as an incentive for people.
If you are looking for term life insurance cash value, you should know that it doesn’t have a cash value.
Cash value is principally a feature of permanent life insurance policies. These insurance plans do not have any expiry, while term life insurance expires completing term or upon death. The premium of a term insurance plan is considerably higher than that of a term insurance plan. Term insurance plans are the most affordable form of life insurance policies. The cash value of life insurance can be accessed in several ways.
How can you access the cash value in life insurance?
It is possible to use the cash value while the insurance plan is in force. One can access the cash value as per the criteria of the individual policy in the following ways.
Making a withdrawal
Unlike term life insurance, a part of the insurance premium accumulates over time. One can withdraw cash value from the insurance plan subject to the amount which has amassed as the cash value. However, it is important to remember that this reduces the death benefit payable to the beneficiaries.
Take a loan against the policy
Another way to use the cash value is to take a loan against the cash value of the permanent life insurance policy. This depends on the policy type, but loan value can be 85 to 90 per cent of the total cash value. A loan against the policy is a good choice since a lower rate of interest is charged when the policy is collateral. Since term insurance cash value is negligible, this type of policy is not eligible for a loan.
Surrender the policy
This is done in the event of a financial emergency or when the insurer is unable to pay future premiums. You get a surrender value less than the cash value. It is because companies charge a penalty for premature closure of insurance plans. However, some products do not charge this penalty if the premium is paid regularly for specific years.
These are the ways in which you can meet any urgent expenses by using the cash value of a life insurance plan. That said, the amount received after surrendering the policy may be a taxable income as per the IT act.
Why does term insurance not have cash value?
Going ahead, you should know why term plan in India does not have a cash value. It is purely an insurance policy with no direct saving. However, it is the most effective and low-cost way to provide financial security to the family. The premium of term life insurance is only a fraction of the premium that one pays for permanent insurance plans.
To ensure adequate insurance coverage while making it affordable, term insurance doesn’t have a cash value. Despite this, the premium paid for term life insurance is deductible from income tax. It guarantees complete peace of mind in the worst-case scenario. Moreover, when it comes to it, one cannot put a price on peace of mind.
Although the idea of building cash value in a life insurance policy is tempting, they are much more expensive than a term life insurance plan. Buy a permanent life insurance policy only if your budget allows you. If not, you can always consider relying on a term plan for your financial needs. If you are planning to buy a term insurance plan, then you may consider Canara HSBC Oriental Bank of Commerce Life Insurance - iSelect start term plan. It is packed with a lot of features such as return of premium, increasing sum assured, option to cover spouse, limited premium pay and terminal illness cover. This unique policy addresses the protection and wealth creation needs of every individual. Make it a part of your financial planning to ensure the financial security of the family.