Cash Value Of Life Insurance

The benefits of life insurance are not just limited to financial protection in case of emergencies. While this remains the primary objective, whole life or permanent life covers also accumulate a cash value. This is the value that lets you take loans to fund your need for urgent capital. This page discusses the different aspects of it. 

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What is the meaning of cash value in life insurance?

The premiums that you pay towards your life insurance policy ensure that your family is financially secured on your demise. Your nominee can claim the death benefit amount in such cases. Apart from this, there is the cash value component in whole life insurance policies.

Cash value adds a savings feature to your life cover. This feature splits your premiums into two parts -

  1. A portion of your money goes into a savings account. The account then earns interest to build your cash value.

  2. The remaining portion of your premium goes towards the cost of the life cover.

Over time, when your account has accumulated enough cash value, you can apply for loans. This gives you access to your savings from your life insurance policy in case of an urgent need for liquidity.

How does cash value accumulate in a life insurance policy?

Your life insurance policy’s cash value takes time to grow. The growth rate is usually limited to a minimum guaranteed rate. The reason why term plans do not offer this benefit is because of the shorter period of coverage.

Here is how your cash value accumulates with a whole life insurance policy.

The part of the premium that goes towards the cash value earns an interest over the years that helps it grow. However, as you grow older, the risk of insuring you increases. Therefore, the insurer reduces the premium amount allocated to the cash value and increases the allocation to the life cover by the same amount. This slows down the accumulation over time.

Ways to Access Cash Value of a Life Insurance Policy

You can access the accumulated amount in any one of the following ways -

  • Make partial withdrawals from the account.

  • Loan out a percentage of the cash value. Not repaying the full loan amount with interest will reduce the death benefit by the outstanding amount.

  • Surrender the policy after paying 2-3 years’ premiums in full. Only 80% to 90% of the acquired surrender value will be loaned to you in such cases.

  • Use the accumulated cash value to pay premiums till it lasts.

Key Points To Remember

  • Cash value feature is not applicable in the case of term insurance policies.

  • Only whole life covers or endowment based insurance policies accumulate cash value.

  • Regular premium payments for a minimum of 2 to 3 years are mandatory for the policy to start acquiring a cash value.

  • You may not be entitled to the whole of the cash value accumulated by your policy. This is subject to the terms and conditions set forth by the insurer.

  • The death and maturity proceeds from an insurance policy will reduce based on how much you have withdrawn from your cash value account.

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