What Is Life Insurance Cash Value?
Cash value life insurance is a kind of permanent life insurance that includes the cash value savings component and lasts until the end of the policyholder’s life. The cash value may be used by the policyholder for a variety of things, like paying their insurance premiums. The percentage of your policy’s cash value that pays interest is what you may take or borrow from in an emergency.
Cash value is not available with term life insurance. The cash value option is available on the following kinds of permanent life insurance:
- Indexed Universal Life Insurance,
- Universal Life Insurance,
- Variable Universal Life Insurance, and
- Whole Life Insurance
How Does It Work?
As the coverage is lifelong, cash value insurance is considered permanent life insurance. Due to the cash value component, cash value life insurance often has more expensive insurance premiums compared to term life insurance. A fixed-level premium payment is needed for the majority of cash value life insurance plans, with the remaining amount being put into a cash value account and the remaining amount going toward the cost of insurance.
The cash value of life insurance earns a moderate rate of interest, and taxes are put off on the gains that have been made. As a result, life insurance’s cash value will rise over time. Because the cumulative cash value partially covers the insurer’s responsibility, the risk to the insurance company lessens as the cash value of the life insurance grows.
How to Withdraw Cash Value
There are typically four ways to withdraw cash value, though this varies by policy. The four methods for withdrawing cash value are as follows:
- Pay Premiums with Cash Value: If you’re low on funds, you may utilize your policy’s cash value to pay the premium. If you empty the cash value account, your policy might expire, ending your life insurance coverage.
- Life Insurance Cash-Out: A surrender cancels your life insurance policy, leaving you uninsured. Your policy’s equity is the cash value plus interest when you surrender it. Your insurance may deduct for debts or missed premiums. Surrender costs may diminish your policy’s surrender value. You may also owe income tax on insurance surrender proceeds.
- Cash Value Policy Withdrawal: Withdrawals may be tax free. If the withdrawal surpasses the cash-value component of your insurance, it will be taxable as income. Also, withdrawing cash value assets diminishes your beneficiaries’ death benefit.
Policy Loans: Your policy’s cash value may be borrowed. This may contain premiums earmarked for the cash value account and accumulated interest. The loan isn’t taxable. If you die before repaying the debt, your death benefit is reduced. Until you repay the loan, interest accrues, reducing your policy’s death benefit.
