What Is Cash Value?

Cash Value

Cash value is an amount generated in your life insurance policy that allows you to access it while you are still alive. The cash value amount increases over time typically without tax charges and it tends to grow faster at the beginning of the policy. You can use the cash value generated in account for different purpose like, taking a loan, withdrawing and paying premiums. In most cases, the withdrawal is not taxed unless the withdrawn amount exceeds the total amount of premiums a policyholder paid. However, withdrawing the cash value or any outstanding loan against the cash value will affect the future death benefit because that amount will be deducted from the death benefit once a policyholder die.

Once a policyholder dies, his or her beneficiaries receive death benefits while cash value remains to an insurer as a profit.

Note: Only permanent life insurance can provides you with a cash value. Term life insurance always doesn't guarantees cash value, thus you can't access it while you're alive as you can do with a permanent life insurance policy.

How cash value is generated?

In every premium paid by a policyholder, the portion is deposited to a saving account known as cash value and the rest amount is allocated to death benefits and other insurance costs. In whole life insurance, cash value grows at the guaranteed rate while in universal life insurance the cash value grows basing on current interest rates. The growth of cash value is usually not taxed.

How cash value is accessed?

There are different ways you can use to access the cash value generated your account while you are still alive. You can access by taking a loan against it, withdrawing it or using it to pay your premiums.

• Withdrawing; Usually, the withdrawal is not taxed unless the amount you withdraw exceeds the total amount of premiums you have paid. 
• Pay premiums; You can also use the cash value to pay your premiums, whether a part or all of your premiums.
• Take a loan; You can take a loan against your policy too, and an insurer will use your policy as collateral. In most cases, the interest in a cash value loan is lower than in a personal loan.

Cash surrender value

A cash surrender value is a cash value amount minus surrender fees, if any. This is an amount you receive when you decide to terminate the policy.

 

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