Cash Value of Life Insurance
What does it mean
Life Insurance comes in two primary flavors: term and whole life. The main difference between the two types is that term insurance includes only the payment of death benefit during a specific period of time (term) as long as insurance premiums are being paid; whereas Whole Life insurance includes the same elements as term insurance but it also includes a savings vehicle where a customer pays extra in order to build additional cash value overtime.
Why does it matter
Cash Value of Life Insurance matters to a banker for three main reasons:
- Source of Collateral: The first reason is that CVLI provides a good source of collateral because it is similar to a savings account.
- Source of Liquidity: The second reason is the since CVLI is a savings vehicle, it can be a source of liquidity for the customer because they can choose to either cash out their CVLI (which cancels the insurance) or they can borrower against the CVLI to get access to the cash.
- More Expensive: The third reason is that Insurance that includes CVLI costs more than a comparable Term Policy (since whole life policies include life insurance + savings vehicle). This additional costs takes away from the dollars available to pay their loan.
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