What is Cash Value in a Life Insurance Policy?
Life insurance provides policyholders with a safety net in the case of their sudden death. Although the insured won’t directly benefit from the policy, they can use them to ensure that their loved ones have the financial resources needed to sustain themselves.
If you are looking for a way to get value from your life insurance policy during your life, whole or universal life insurance policies may be the right option for you. These plans accrue cash value over time, making them a great option for people who wish to leverage their life insurance policies while they are still alive.
Not sure what cash value in a life insurance policy means? Here’s everything you need to know.
Which Life Insurance Policies Have Cash Value?
Not all life insurance policies have cash value. If you want to build cash value with your life insurance policy, you must purchase a permanent life insurance policy. This includes both whole life insurance and universal life insurance.
What is Cash Value in Life Insurance?
When a life insurance policy has cash value, that means the plan will build up a value that the policyholder can tap into over time. The cash value feature typically earns interest and grows tax-deferred. If your plan has a cash value feature, a portion of your premiums will go into the cash value of the policy. The rest of your premiums are used to pay policy fees and to insure you.
How Can Cash Value Be Used?
The cash value of your life insurance policy can be drawn in several different ways. You can choose to take a loan out from the cash value of your policy, but this amount must be paid back before the insured passes away. If it isn’t paid back, the remaining amount of the loan will be deducted from the death benefit.
If you don’t want to take a loan from the amount, you can just withdraw it. People often do this to supplement their retirement income, pay premiums, or do a variety of other things. Though, if you decide to end your policy early, you can also receive the cash value upfront. The insurer will deduct any surrender charges, and doing so typically ends your life insurance coverage. Therefore, we suggest that you make sure you are comfortable being uninsured before surrendering your coverage.
Cash Value Loans Explained
If you decide to take a loan from the cash value of your life insurance plan, you will be required to pay interest on the loan until it’s paid back. The interest may be a fixed rate or variable rate, depending on your plan’s rules. State laws normally dictate the maximums for life insurance policy interest rates.
One interesting fact about cash value loans is that they won’t appear on your credit report. Use this to your advantage while you plan for security in retirement.