- Life Insurance

Cash Value Life Insurance

In addition to life insurance risk protection, permanent life insurance, such as whole life, universal life and variable life, includes an enforced savings component called cash value. The cash value element is one reason permanent life insurance premiums are higher than the premiums for term insurance as a portion of the premiums goes towards building your cash value fund. Cash value can be an attractive feature for estate planning as it is tax-deferred until the time it is withdrawn or paid out.

At the beginning of the policy a larger portion of the premium goes towards cash value, minus fees and commissions, but as you get older an increasing amount of the premium goes towards paying for the “mortality expense” (the cost of the term life component) and less and less goes towards building the cash value.

The policy’s cash value accumulates over time through premium contributions and interest. In a traditional whole life or universal life policy most insurers guarantee a minimum interest rate return for the cash value fund, often at least 4%, but the rate may be more than this if investments perform well. In a variable life policy the cash value is invested in a mix of stocks, bonds and mutual funds which may outperform the whole or universal policies, but also may under perform depending on market conditions and lose cash value.

If you need funds for an emergency or other expenses, you can borrow against your cash value, paying the current policy loan interest rate. You can repay the money borrowed to maintain the death benefit coverage or if you choose not to repay the borrowed funds, the policy’s death benefit and cash surrender value is reduced by the amount of the money borrowed plus interest. Exactly how much your death benefit is reduced by withdrawals of cash value varies from policy to policy. In a universal life policy the value is usually reduced less than in a traditional whole life policy.

The cash value of your policy is not automatically paid to your beneficiaries in addition to the death benefit unless you choose this option, which will increase the cost of your premiums.

If you decide to stop paying your premiums and surrender your permanent life insurance policy you can withdraw the cash value, minus surrender fees. Generally the longer you have been paying into your permanent life policy the lower the surrender fees and the larger the cash surrender value.

Cash value can be an attractive feature of permanent life insurance policies as the enforced savings grow tax-deferred. Make sure you understand your policy’s regulations for borrowing against and repaying cash value, whether the returns are guaranteed and if the policy will pay out the cash value to your beneficiaries upon your death.