What is a potential consequence of cash value growing too quickly in a life insurance policy?

When cash value accumulates rapidly in a life insurance policy, it can potentially lead to the loss of tax benefits. Life insurance policies offer certain tax advantages, such as tax-deferred growth of cash value and tax-free death benefits to the beneficiaries. However, if the cash value grows too quickly, the policy may be classified as a Modified Endowment Contract (MEC). This designation can change how the policy is taxed, meaning that any withdrawals or loans taken from the policy could incur taxes and possibly penalties.

It’s important for policyholders to understand this dynamic because maintaining a balance in cash value growth can help preserve the intended tax advantages that come with standard life insurance policies. In contrast, while increased death benefits, reduced premium payments, and elevated coverage limits may indeed be outcomes of policy provisions or rider decisions, they are not directly associated with the consequences of rapid cash value growth in the same way that loss of tax benefits is.