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Do you know what “cash value” is?
If you own a whole life insurance policy, chances are you do. But, if you don’t, then chances are you might not. But you might want to. It can be pretty useful.
Life insurance’s primary purpose is to provide a death benefit when the insured person passes. But some types of insurance build cash value as premiums get paid. And this cash value can grow over time. And that cash value accumulates on a tax-deferred basis, meaning you generally won't pay taxes on the growth unless you withdraw more than you've paid in premiums. (Related: Taxes and life insurance)
You can gauge the possible growth of cash value in a life insurance policy through an illustration provided by a financial professional.
Connect with a MassMutual financial professional
You can borrow from your life insurance cash value for any purpose, like helping to pay for college tuition or cover an emergency expense.
Of course, there are consequences, as borrowing against life insurance cash value increases the chances that the policy will lapse, reduces the cash value and death benefit, and may result in a tax bill if the policy terminates before the death of the insured.
Nevertheless, some folks find that the cash value of a life insurance policy is a nice feature to have.
Life insurance cash value can also be used to help cover premium payments, should circumstances warrant. It will also serve as the basis for payment — the value that will be paid to you — should you choose to surrender your policy.
Cash value and different types of life insurance
So, what kinds of life insurance have cash value?
Typically, permanent life insurance, which offers life insurance coverage throughout a policyowner’s life, carries a cash value component, provided the premiums are paid for a certain period.
Different types of permanent life insurance policies offer different features affecting how cash value grows or can be used.
- Whole life insurance. The cash value increases based on a growth rate that is guaranteed by the carrier. How fast the cash value grows depends on how quickly premiums are paid. For instance, some policies can be paid up after 10 premium payments, and so build cash value relatively quickly. Others use a pay-to-age-100 premium schedule, and so are slower to build substantial cash value.
- Universal life insurance. This kind of policy offers premiums that are generally flexible, within certain limits, which affects the rate at which cash value builds. Some people pay the maximum premium possible into a policy for the first years of coverage, building up the policy’s cash value. That cash value can then be used for any purpose. For example, it could be used to pay premiums if their income shrinks in retirement.
- Variable universal life insurance. This kind of insurance allows policyowners to put a policy’s cash value into investment options managed by the insurance company. Any earnings from the investment options add to the cash value and may increase the size of the death benefit of the insurance policy. Insurance and other costs are paid from the account. However, the policy could lose value because it is tied to market performance.
These different types of permanent life insurance can also offer a variety of other features, like living benefits, through riders. And as noted, they can offer different premium plan options as well.
Conclusion
In the end, life insurance cash value can be a useful tool for those looking to build funding options while also helping protect their loved ones. Many people turn to a financial professional to help understand what types of life insurance offering cash value may best fit their individual preferences and situation.
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Frequently Asked Questions about life insurance cash value
Q. What is cash value in life insurance?
A. Cash value is a built-in savings component found in permanent life insurance policies. As you pay your premiums, a portion goes toward the death benefit, and another portion accumulates as cash value on a tax-deferred basis.
Q. Can I withdraw cash value from my life insurance policy?
A. Yes, you can access your cash value through policy loans or partial surrenders to help fund major expenses like college tuition or emergencies. However, doing so will reduce your policy's death benefit and cash value, and may increase the risk of the policy lapsing.
Q. Is life insurance cash value taxable?
A. The cash value grows tax-deferred, meaning you don't pay taxes on the gains as they accumulate. You generally only face a tax bill if you surrender the policy or withdraw an amount that exceeds the total premiums you have paid into the policy.
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Learn more about life insurance...
Treat the cash value with care
Understanding insurance riders
Life insurance and taxes - FAQs
This article was originally published in June 2016. It has been updated.
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