The net cash value is the amount you would receive if you surrender or sell the policy less any fees. It is also called the surrender cash value. Cash value insurance policies provide lifelong coverage combined with an investment account. The cash portion of your premiums is deposited in an investment account which generates interest over time.
Should you surrender your coverage to the insurer, you will receive your policy’s cash value minus any fees. This cash value can also be accessed as a loan on your policy.
A cash value policy is any policy that offers a death benefit alongside an accumulated value in a separate within the policy. In such policies, your premium is split into three parts:
1. Insurance Cost – the cost of funding your policy’s death benefit
2. Fees & Overhead – insurer’s operational costs
3. Cash Value – your account within the policy that gains interest
Note that the death benefit and the cash value on your policy are separate. Hence, your beneficiaries do not receive the cash value on your policy when you die. Any balance on your insurance policy when you pass remains with the insurer.
Remember that this value is what you would receive if you surrendered your policy; it is similar to investment and can be used as collateral to receive a loan.
It takes several years to gain any reasonable interest on the cash value, especially because in the early stages, a bulk of your premium will be eaten up by your insurer’s operational fees.
We would advise anyone advanced in years with the intent of leaving an inheritance for their loved ones to purchase another form of life insurance.
Types Of Cash Value Life Insurance Policies
There is more than one type of cash value life insurance policy; some of the most common types include:
|Whole Life Insurance||With this policy, your premiums are fixed till you die. A percentage of your premiums goes to a savings account where interest will be accumulated. You have access to these funds before you die.|
|Universal Life Insurance||Universal life insurance allows you some flexibility in how you pay your premiums. For example, you can pay excess into your savings account on a good month, and on a rough month, you can pay your premiums from your savings account.|
There are three types of universal insurance plans: guaranteed universal, universal variable, and indexed universal life insurance.
|Variable Life Insurance||In such policies, the cash value can be invested in a portfolio offered by the insurer, such as a mutual fund, stocks, or bonds. The major difference between this and whole life insurance is that you can choose how your money is invested.|
How To Access The Cash Value On Your Policy
Remember that the cash value on your policy is meant for your use. Should you pass away, your beneficiaries will only have access to the death benefit and not the cash value on your policy.
So how do you access the cash value on your policy? You can do this by:
Make A Withdrawal
You can make a withdrawal from the account your cash value is deposited in. However, there is a clause; when you make a withdrawal on your policy’s cash value, the value of your policy decreases. So, in essence, the death benefits your beneficiaries will receive also be reduced.
Take A Loan
The cash value of your insurance policy can be used as collateral when taking a loan. However, it would help if you considered how likely it is to repay your debt before you pass. Should you pass without repaying the loan, the death benefit on your policy decreases.
Pay Your Premiums
Some months can be rough financially. Unfortunately, our financial obligations aren’t concerned with whether we are having a good month or not. You can use the cash value on your policy to pay for your monthly premiums during these rough months.
Sell Your Policy
People purchase life insurance for different reasons, if that reason no longer exists, you will likely not need your policy anymore, and you can choose to sell it for a cash settlement. The agent who sold you the policy will get a percentage of your settlement.
Surrender Your Policy
If you don’t want to sell your policy, you can surrender it. The cash value you’ll receive is a net amount since the insurer will deduct a ton of expenses from the amount. In the unlikely event that your cash value is more than the total premiums you have paid, you will be taxed on the excess.
Frequently Asked Questions
Does Every Life Insurance Policy Come With Cash Value?
No, not every life insurance policy has a cash value component. For example, term life insurance does not have a cash value component. However, policies like whole life and universal life insurance have cash value components.
How Long Will It Take To Build The Cash Value On My Policy?
This depends on what type of policy you purchased. Generally, it takes several years to build a substantial amount on your policy’s cash value. However, some policies are designed to build up faster than others.
Discuss your needs with your insurer as they are best to advise you on what type of policy would be best for you.
Why Are Cash Value Premiums So High?
Cash value policy premiums are higher than regular life insurance because part of the premium goes towards savings.
Is A Cash Value Right For Me?
A cash value policy could entice many, but we wouldn’t advise you to jump right into one. You may be better off exploring other investment forms before opting for a cash value policy.
If you are a high-income earner who has already maxed out the contributions on your retirements, then a cash value policy isn’t a bad idea.
If your objective for getting life insurance is to cover financial obligations with an end life such as mortgage or debt, then term life insurance is a better option.
Before purchasing a cash value insurance policy, consider why you need insurance, and discuss your reasons with your insurer. They will be in the best position to advise you on what policy suits you best based on your needs.