The term “cash value” refers to a savings component of certain permanent life insurance policies, such as whole life insurance and universal life. In many instances, it can provide substantial value, depending on your individual needs and long-term goals. Read on the learn the basics of cash value life insurance, including the potential benefits for you and your family.
What Is Cash-Value Life Insurance?
Cash-value life insurance is a kind of permanent life insurance that comes with an investment feature. Referring to the portion of the policy that earns interest, “cash value” can usually be withdrawn or borrowed against in case of emergencies or timely business opportunities.
The following types of life insurance policies can include a cash-value feature:
- Universal life insurance
- Whole life insurance
- Indexed universal life insurance
- Variable universal life insurance
It’s important to note that term life insurance policies do not offer any cash value features.
How Does it Work?
Certain permanent life insurance policies come with a pair of features:
A death benefit: This refers to the amount paid out to beneficiaries once the insured person dies. Often called the “face value” of a policy, the death benefit will equal the amount of life insurance coverage you bought when you signed up for your plan. (for instance, a $200,000 whole life insurance policy).
Cash value: This added feature can make a policy more valuable because you are often able to access the money before you pass away. With a cash value policy, a portion of every premium goes toward insuring your life, while a separate portion is used to build up a cash value. That cash value portion accrues a certain amount of tax-deferred interest, depending on the kind of life insurance policy you buy.
How Does Cash Value Grow?
How cash value accumulates depends on the type of permanent life insurance policy you purchase. A standard whole life insurance policy will guarantee cash value with a fixed rate of return. With indexed universal life, on the other hand, the cash value growth will be tied to the Standard & Poor’s 500 or another stock index.
With variable universal life insurance, the cash value will be invested in a diversity of accounts of bonds, stocks or mutual funds. This type of policy offers the greatest return potential, but also comes with a higher risk that you could lose cash value if investments perform poorly.
What Are the Advantages?
If you have a permanent life insurance plan with cash value, there are a number of valuable things you can do with the money, such as:
You can make partial withdrawals. If you run into an emergency or a fleeting opportunity requiring immediate cash, you can withdrawal some of your benefits. Bear in mind, however, that any withdrawals will reduce the policy’s death benefit unless you repay it at some point.
You can borrow against the policy’s cash value. If you have a permanent life insurance plan with cash value, it makes it much easier to get a loan. You can borrow money for anything you like, whether it’s for an emergency or a luxury item. Just like typical loans, however, you will have to repay the balance with interest to maintain your death benefits.
You can withdraw every bit of the cash value and surrender the policy. If something changes in your life, you may no longer see the benefit of a permanent life insurance plan. For instance, a spouse may pass away or your child could become independently wealthy. You may also experience an unexpected life event, such as an illness or an emergency, requiring immediate cash. If you have a permanent life insurance plan with cash value, you can withdrawal all of the cash value at any time. Bear in mind, however, that this will end your life insurance coverage. You may also have to pay a surrender fee to the insurance company if you withdraw your entire cash value early on in the policy.
If you are short on cash, you might be able to leverage the cash value in your life insurance to help fund your policy’s premium. Check with your agent to find out how this feature might work for your specific plan. Remember, though, if you completely deplete the money in the cash-value account, it will usually cause your policy to lapse, which would terminate your life insurance coverage altogether.