Most people know about the death benefit paid by life insurance policies, but many people are not aware that life insurance policies can also accrue a cash value over the lifetime of the policy. This cash value can be withdrawn or loaned against with a loan from your life insurance policy, and may also grow through interest earned, dividend payments, or variable investment growth. When a policy is surrendered before the death of the insured, the cash surrender value is paid to the owner. The cash value feature makes life insurance not only a great source of protection for your family, but also a great savings and investment tool.
Types Of Life Insurance With Cash Value
Types of life insurance with cash value are whole life, universal life, and variable universal life insurance policies. Term life insurance does not have a cash value. The cash value is guaranteed to accrue at a certain rate in a whole life insurance policy as long as the illustrated premium payments are made, but not necessarily with a universal life or variable universal life contract.
Generally speaking higher cash values in whole life policies lead to higher dividend payments, which can be paid to the owner of the policy, added to the cash value, or used to buy more paid up insurance. The cash value in a whole life insurance policy can be used to take loans or withdrawals. These may affect the death benefit of the policy but the policy will remain in force if premium payments are made. The cash value will become equal to the death benefit when the policy is at maturity date. This is at a set age such as 95 or 121. When this occurs the policy can pay out the death benefit, even if the insured is still living. No further premium payments are required when the policy reaches it’s maturity age.
In a universal life insurance policy, premium payments are all made into the policy cash value, and the cost of insurance is deducted from the cash value. Any excess of premium payments over the cost of insurance stays in the policy as part of the account value. This value is usually paid either a fixed rate of interest, or growth is tied to an index such as an equity index. The value can be used to take loans or withdrawals during the life of the policy. If premium payments are not made, the cash value is reduced each month by the cost of insurance.
Variable Universal Life
A variable universal life insurance policy works very similarly to a universal life insurance policy, except the cash value or account value is allocated to separate accounts within the life insurance policy, which are essentially mutual funds. The cash value then either grows or declines depending on the funds performance. Excess premium over cost of insurance accrues in the cash value, and if no payments are made the value is reduced by the cost of insurance. The cash value can be used to take loans and withdrawals during the life of the policy.
Life Insurance Is An Investment
The cash value of life insurance can make it a very wise investment, even if the insured lives a long and healthy life. It is a great place to save money, and policies can actually realize a positive internal rate of return, even while providing life insurance protection. It can be a great way to diversify your investment holdings, all the while providing extra security and protection to your family and those who depend on you.