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 accessed through a withdrawal or a loan from your life insurance policy This cash value and grows through payments into the policy, interest earned, dividend payments, or growth in variable universal policies through growth in the investment subaccounts. Not all life insurance has a cash value. Term policies do not, but permanent forms of life insurance do.

When a policy is surrendered before the death of the insured, the cash surrender value is paid to the owner.  At the maturity age of a permanent life insurance policy, the cash value equals the face amount(the amount of the coverage) and it gets paid out to the beneficiary. 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 because it grows.

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 has no cash value.  The way that the value grows is different for different types of policies. 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.

Whole Life

Whole life insurance policies accrue cash value steadily over years. The growth compounds and can speed up with dividend payments retained in the policy. Generally speaking higher cash values in whole life policies lead to higher dividend payments. Dividend payments can be used in three ways. They 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 can be accessed through loans or partial surrenders of the policy which are akin to a withdrawal.  These partial surrenders may affect the death benefit of the policy but the policy will remain in force if premium payments are made.  As mentioned earlier, the cash value will become equal to the death benefit when the policy is at the maturity date.  This is at a set age such as 95 or 121 depending upon when the policy was issued and which company issues it. 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 its maturity age.

Universal Life

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 will then either grow or decline depending on the fund’s performance.  Excess premiums over the cost of insurance accrue 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.

Cash Value Vs. Surrender Value

The cash value of a policy does not always equal the surrender value of the policy. The surrender value is the amount that the owner will receive if the policy is surrendered after any surrender charges are assessed by the life insurance company. Surrender charges are typically assessed during the start of the policy life and decline over time. Eventually, there are no more surrender charges and the cash value and surrender value are the same.

Policy owners need to be conscious of surrender charges. They can be quite costly and it can make it expensive to take out a new policy and immediately surrender it. The life insurance company justifies surrender charges because it is quite costly to process and underwrite a life insurance application and policy, so they want to incentivize the policy owner to hold the policy sufficiently long so that they can make their money back. If the policy is surrendered right away, the insurance company collects the penalty to recoup some of the costs.

If the owner funds a policy with one lump sum or high first premium payment, it makes paying surrender charges extremely painful to the payer.

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.

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