Table of Contents
- We’ll get to the bottom of all these questions, so be sure to read on
- What is Cash Value Life Insurance?
- Breaking Down the Cash Value of Life Insurance
- Is Cash Value the Same as the Cash Surrender Value of Life Insurance?
- How You Can Use Your Policy’s Cash Value Component
- Protect Your Family Even When You’re Gone
In the US, 70% of adults believe that life insurance provides financial protection. Despite that, only half of them have some form of life insurance. What’s more, 20% of those who do admit to not having enough coverage!
If you don’t have life insurance yet, now’s the best time to invest in a policy. This way, you can worry less about leaving your loved ones in a financial disaster.
You might feel even more secure if you opt for a cash value life insurance policy.
The question is, what exactly does the cash value of life insurance refer to? How does it work and what benefits can you get from it?
We’ll get to the bottom of all these questions, so be sure to read on
What is Cash Value Life Insurance?
These are life insurance policies that come with a savings component. Most cash-value life insurance policies are permanent, meaning, they provide lifelong coverage. So long as you pay your monthly premium, you’ll remain covered throughout your life.
Part of your monthly premium payments goes toward this “cash value” account. The rest goes toward keeping your policy valid, which at some point, will pay out the death benefit.
That said, permanence is one of the key differences between a cash value life policy and a term life policy. Term life insurance has an “expiration” date, usually between 10 and 30 years. Once it expires, you either forego insurance or you have to purchase a new policy.
Moreover, since term life policies aren’t permanent, they don’t come with a cash value. That’s what makes term life plans cost less than their cash value counterparts. They can, however, cost more in the long run if you decide to “renew” at an older age.
Breaking Down the Cash Value of Life Insurance
Cash value is the actual sum of money that builds inside a permanent life insurance policy. It’s the total amount of cash held inside the money-building component of your policy.
Let’s say you purchase a whole life cash value policy that comes with an $80 monthly premium. That $80 will go to three areas: the cash value, the cost of insuring you, and other policy fees. The actual percentage of what goes toward your cash value depends on the insurer.
Either way, your insurer would first take out the amount needed to actually insure your life. Then, they would deduct the costs associated with maintaining your policy. The remaining amount would now go into your policy’s cash value component.
Some insurance companies put that cash value into investments like stocks and bonds. A portion may also go into a savings account (usually with a higher yield than a standard savings account).
As you continue to pay your premiums, more money then goes into these investments or savings. Every year, they’ll earn profits or interests. So, on top of the money you’ve already saved, you also get to enjoy built-up interest.
That said, the cash value of whole life insurance is all the money you’ve grown inside your “savings” account.
Is Cash Value the Same as the Cash Surrender Value of Life Insurance?
The “surrender value” is the amount of money you’ll get if you access the cash value of your policy. Depending on your insurer’s terms, you may have to pay fees if you access your policy’s cash value at an early date. Some insurers also impose penalties for “borrowing” against a policy’s cash value.
That said, the surrender value is the policy’s cash value less the fees and penalties.
In most cases, the fees and penalties only apply to early cash value withdrawals. Again, this depends on your insurer, but most have a cash value access “restriction” of around 10 to 15 years.
If you withdraw from your policy’s cash value after it hits that age range, you likely won’t pay penalties. If you withdraw earlier than that though, the surrender value will be less than the actual cash value.
How You Can Use Your Policy’s Cash Value Component
After 10 to 15 years of paying your premiums on time, you have enough money in your cash-value account. At this point, your insurer is likely to give you access to the money without any extra charges or fees.
It’s your money, so you can use it for anything you like, so long as it’s legal.
Let’s say that run into an unexpected expense, which for the average American, is about $3,500. Let’s also say you don’t have this kind of cash or you don’t want to dip into your other savings.
In this case, you can withdraw from the cash value account of your life insurance policy. You can then use the money to cover your emergency expenses.
That’s just one way on how you can use the cash value component of a permanent life insurance plan though. Here are a few other ways to capture your policy’s accumulated value.
Borrow Against It
In other words, you take out a loan using your policy’s cash value. Like any other loan, however, it will also accrue interest until you pay it back in full.
The difference is, you’re not borrowing from a lender. It’s also your money, so you don’t have to worry about your loan application getting rejected. Whereas standard personal loans have quite the high rejection rate — as high as 76%.
Pay Your Premiums
If you get into a financial pinch and can’t pay your premiums, you can use some of your cash value funds. This way, you don’t run the risk of invalidating your life insurance policy.
Surrender the Entire Policy
This means that you’ll cancel your life insurance coverage. While this isn’t the best route, you do have the right to surrender your policy to get access to its full cash value. Your insurer will subtract unpaid premiums from your surrender value though. Instead of surrendering your life insurance policy, you can consider selling it for cash through a life settlement.
Protect Your Family Even When You’re Gone
Life insurance may not be mandatory, but it’s still one that you shouldn’t go without. It can serve as an extra layer of financial protection for your family in case of your passing. Besides, you’d get to enjoy the cash value of life insurance while you’re still alive and healthy.
Interested in other, similar topics? Check out some of our other articles!