4 Drawbacks You Should Know About Cash Value Life Insurance Before Opting for It

Financial Horizons: Insights for Building Wealth and Securing Your Legacy

By Dr. Jose G. Cardenas, Chief Tax Strategist at The C & R Group, LLC

When people hear “cash value life insurance,” their first thought is usually, “That sounds like free money with life insurance attached!” And while cash value policies (like whole life or universal life) can be powerful financial tools, they also come with potential pitfalls that you must understand before diving in. Too many families buy in without knowing the drawbacks—and end up disappointed later. Let’s break down the four major drawbacks you should know before deciding.

1. Risk of Losing Your Coverage

One of the biggest misconceptions about cash value policies is that you can borrow against them without consequences. But here’s the truth: if you borrow too much and can’t repay it, your policy could lapse. Not only do you lose your life insurance coverage, but you may also get hit with tax consequences on the outstanding loan balance. That’s a double whammy you don’t want.

2. Risk of Getting a Reduced Payout

Every dollar you withdraw or borrow from your policy’s cash value reduces your death benefit if not paid back. For example, if your policy had a $500,000 death benefit and you took out $100,000 in loans, your beneficiaries may only receive $400,000—or less. For families counting on that payout, this can create serious financial shortfalls.

3. Possible Tax Implications

While life insurance proceeds are generally income tax-free, cash value withdrawals and loans are not always so clean. If you withdraw more than what you paid into the policy (the premiums), the excess may be taxable as income. And if your policy lapses with a loan balance, the IRS may view the unpaid loan as taxable income. That’s why tax planning is critical when managing cash value.

4. May Not Be Available to Everyone

Not all policies offer cash value features. Simplified issue or guaranteed issue life insurance—often purchased by people with health challenges—usually don’t come with the ability to build cash value. Even when available, policies with cash value can cost significantly more than term life policies, making them unaffordable for some families.

The Bottom Line

Cash value life insurance can be a powerful wealth-building tool when structured and managed properly. But like any tool, it has risks if misused or misunderstood. That’s where having a trusted advisor makes the difference—helping you weigh costs, benefits, and tax implications so you can make a confident decision.

At The C & R Group, LLC, we guide families and business owners through these complexities every day, ensuring your financial strategy supports both your short-term budget and your long-term legacy.

👉 Ready to learn whether a cash value policy fits your goals? Let’s have that conversation.

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About the Author

Dr. Jose G. Cardenas is a retired U.S. Army Finance Officer and the Chief Tax Strategist at The C & R Group, LLC. With a Doctorate in Business Administration and over 20 years of experience in financial strategy, tax planning, and life insurance, Dr. Cardenas helps individuals and business owners protect their wealth and build a legacy. Learn more at www.thecrgroupllc.com.

📌 Disclosure:
This article is for educational and informational purposes only and is not intended to serve as personalized legal or investment advice. Dr. Jose G. Cardenas, DBA, provides tax advisory services through The C & R Group, LLC. Insurance strategies, including Indexed Universal Life (IUL) and annuity products, may be offered through his role as a licensed financial professional affiliated with Experior Financial Group.

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