Cash value is considered the savings portion of your whole life insurance policy. Because of the cash value aspect, some consider whole life insurance an asset in an overall financial portfolio.
What Is Cash Value?
Cash value is the value that accumulates in your whole life insurance policy. Typically, cash value is determined when you purchase your whole life policy. Cash value grows as you pay your premiums, which are the payments you make to the insurance company to purchase and maintain your policy.
Growing Cash Value
So, how exactly does cash value increase in your whole life insurance policy? Cash value builds over time as you pay the insurance policy premium. A chunk of your monthly premium payment is above the actual cost of providing insurance coverage. This extra payment amount, plus interest, goes toward building cash value and in most policies the earnings grow tax-deferred. At first, cash value will increase slowly, but as you make additional premium payments the cash value will grow at a faster rate.
The Insurance Law sets a minimum amount for cash value, which reflects an accumulation of your premiums minus allowances for insurance company claims and expenses. Over the life of your policy, cash value grows and that growth may be tax-deferred.
Face Amount Versus Cash Value
Cash value is separate and different from the face amount of your life insurance policy. The cash value, like an investment, builds over time within your policy. The face amount is the dollar amount that your beneficiaries receive in the event of your death. It most cases the face amount of your whole life insurance policy is greater than your cash value, especially in first several years of your policy.
Cash Value Benefits
Cash value is a benefit of carrying a whole life insurance policy. As the policyholder, you can benefit from the cash value that accumulates in your whole life insurance policy in a few different ways:
- Dividends: Dividends are the difference between the premium charged and the actual earnings and cost of providing coverage. You can use the dividends in lieu of further premium payments, or you may choose to receive dividends in the form of cash. Another option for you is to purchase additional insurance coverage with the dividend
- Paid Up: When you accumulate enough cash value, you may decide to use it to cover premium payments--this is known as being paid up. However, if you make a withdrawal from your cash value at some point, you may have to begin making premium payments to keep the policy from lapsing
- Asset: As the policyholder, you do have the option to surrender the policy and receive the cash benefit amount or to borrow against the cash value. If you decide it is necessary to surrender your policy, the amount of money you receive is the cash value. However, a penalty may be applied if you surrender your policy. Whole life insurance can serve as an asset to both you and your beneficiaries. For you, this is true because you have a right to a portion of your cash value. For your beneficiaries, the asset comes in the form of the death benefit
- Loan: As the policyholder, you can borrow against the accumulated cash value through one or more loans. There is usually no penalty for taking a loan. However, any unpaid loans, plus interest, are subtracted from the death benefit, and the loan may slow the growth of your cash value
Remember that most benefits are contingent upon maintaining your policy, and making premium payments on time.
Cash value is an added benefit to an already valuable whole life insurance policy. Low cost whole life insurance policies are available to provide financial security to your family. Compare quotes from multiple insurance companies to choose the best policy for you and your family--just enter your zip code to get started.
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