How Does Cash Value Life Insurance Work?

Cash value life insurance policies provide lifelong coverage combined with an investment account. A portion of your premiums are directed to the investment account – the cash value – and this money grows with interest over time. If you decide to cash in your life insurance early and surrender your coverage to the insurer, you will receive the policy’s cash value (minus fees). You can also access the cash value as a policy loan, use the cash value to pay premiums or make a partial withdrawal.

• What is cash value life insurance?
• Types of cash value life insurance policies
• How to use your cash value

What is cash value life insurance?

Cash value life insurance refers to any life insurance policies that not only have a death benefit but also accumulate value in a separate account within the policy. Each time you make a premium payment, the money is split among three different categories:

• Cost of insurance: the amount required to fund the policy’s death benefit
• Fees and overhead: the insurance company’s operating costs and fees
• Cash value: your account within the policy, which accumulates value

A life insurance policy’s cash value is separate from the death benefit, so your beneficiaries would not receive the cash value if you passed away. Any cash value that’s left in your life insurance policy when you die is kept by the insurer. A life insurance policy’s cash value is essentially the amount of money you would receive if you decided to give up the policy to the insurer, or surrender your coverage. The cash value behaves like an investment as it grows tax-deferred with interest, as determined by the type of policy, and can be used as collateral for a loan.

Even though the cash value’s growth is tax-deferred, it will still take several years of compound interest to grow meaningfully. Plus, for the first several years of coverage the majority of your premiums are eaten up by the cost of insurance and fees, so cash value accumulation is slow.

That’s why we generally don’t recommend a cash value life insurance policy if you’re fairly advanced in years. The older you are, the more likely that the cost of your premiums will outweigh any eventual benefit you see. If you need a permanent life insurance policy to cover estate taxes or leave an inheritance, guaranteed universal life insurance provides lifelong coverage with little to no cash value component.

Types of cash value life insurance policies

Cash value life insurance policies are typically permanent, meaning you have coverage for the entirety of your life so long as premiums are paid. Some of the most common types of cash value life payday loans in Morristown insurance policies are:

Term life insurance policies have no cash surrender value. This means that if you decide to give up your coverage to the insurer, you won’t receive anything in return. On the other hand, it’s also the reason why term life insurance is several times less expensive than cash value life insurance.

The only reason you’d get money back from an insurer with a term life insurance policy is if you have a return of premium rider. This rider adds to the cost of your premiums but ensures that you’ll receive a portion or the sum of premiums paid if you live past the term of the policy.

Dividends and participating cash value life insurance policies

Mutual insurance companies don’t have shareholders and are, in essence, owned by their policyholders. Therefore, if the insurer makes more money than is needed to run the business, they pay some of it back to policyowners in the form of a dividend. If you have a participating cash value life insurance policy, it means you’re eligible to receive a dividend. Dividends are not guaranteed, but most of the top mutual insurance companies have consistently distributed them for decades.