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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 long life covers also accumulate a cash value. This is the value that lets you take loans to fund your need for urgent liquidity. You can use this cash value of life insurance in various ways but first, let us learn what the cash value of life insurance is. 

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What is Cash Value in Life Insurance?

Cash value in life insurance is the share of your plan that earns interest and may be available for you to borrow or withdraw against in case of an unexpected event. The policyholder can use the cash amount for various purposes like to pay plan premiums and source of loans. Cash value adds a savings and wealth creation feature to your life cover. This feature splits your premiums into two parts -

  • A portion of your money goes into savings and wealth creation. The amount then earns interest to build your cash value.

  • The remaining premium is used to cover the cost of the financial security.

Over time, when your account has accumulated enough cash value, you can either receive all the accrued cash value at the time of maturity or apply for loans during the policy term in case you have a financial emergency. This gives you access to your savings from your life insurance policy in case of an urgent need for liquidity.

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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 the minimum guaranteed rate. Life insurance policies like endowment and whole life insurance plans accrue cash value, whereas most term insurance plans do not. The reason why term plans do not offer this benefit is because of the shorter period of coverage.

Here is how the whole life insurance cash value is accumulated.

The part of the premium that goes towards the savings earns interest over the years which helps it grow. However, as you grow older, the risk of insuring you also 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 cash value accumulation over time.

Note: You can also use a cash value life insurance calculator to see the amount accumulated as cash value at any given point in the policy duration.

Ways to Access Cash Value of Life Insurance Policy

You can access the cash value life insurance amount in any of the following ways 

  • Making Cash Withdrawals: A portion of the premium is used as savings in life insurance policies and collects interest over time. You can access this accumulated cash value of life insurance by making cash withdrawals.

  • Taking Loans Against Policy: You can also access the collected cash value by taking a loan against the cash value life insurance. The amount of loan you can take depends on the policy’s T&Cs, but most life insurance plans provide 90% of the cash value as loans in case of an emergency. This is a good option for those facing a financial emergency, as when you use life insurance as collateral, the interest rates on the loan amount are lower.

  • Surrendering the Policy: Another way to access your cash value life insurance is to surrender the life insurance policy. Usually, people surrender their policy if the policyholder is unable to pay the premiums and, after surrendering, receive an amount lower than the cash value. This option is not advisable, as after surrendering, the policyholder will no longer be covered under the policy benefits, and thus in case of an eventuality, the family will not be eligible to receive any benefit amount.

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How Can I Use the Cash Value Life Insurance?

You can use the cash value of life insurance in the following ways:

  • Fund Medical Emergencies: Unexpected financial emergencies can arise at any time. You can use the cash value life insurance to fund medical emergencies by making cash withdrawals or taking loans against the policy.

  • Post-retirement Expenses: You can take care of your post-retirement expenses by using the accumulated cash value of life insurance. 

  • Pay for Hospital Bills: Hospital bills can be expensive to take care of, thus, it is better to use the cash value life insurance to pay for the piling hospital bills in times of need.

  • Policy Outlives its Purpose: A lot of people buy life insurance plans for a specific purpose, and once the purpose is served don't see the need to continue their life insurance policy. In such cases, you can terminate the policy and receive the accrued cash benefit.

What are the 4 Factors that Affect the Cash Value Life Insurance in India? 

Here is a list of all the factors that impact the cash value life insurance in India.

  • Policy Duration:

    The longer the policy has been active, the more will be the cash value of life insurance. This is because the savings portion collects interest, and the longer the amount collects interest, the more will be the cash value.

  • Premium Amount:

    The premium amount paid affects the cash value of life insurance as a portion of the premiums collects the interest, which becomes the cash value. Thus, the larger the premium, the more will be the accrued cash value life insurance.

  • Fund Market Performance: 

    A lot of the life insurance plans that offer cash value are market linked, and the performance of funds impacts the accumulated cash value.

  • Previous Cash Withdrawals:

    Any previous cash withdrawals made will reduce the cash value of life insurance. This is because the withdrawals are made from the collected cash value.

Key Points To Remember 

  • You should always go through your life insurance policy documents to see if the policy accrues cash value and the ways in which you can access the amount accumulated.

  • The 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.

Wrapping it Up!

Life insurance policies in India usually invest a portion of the premium paid towards the insurance part, and the other portion is used as savings for wealth creation. The latter portion collects interest as per the applicable interest rate over time and allows policyholders to access this amount as per their needs. You can use the cash value life insurance amount to pay off any financial emergencies or unexpected expenses. 

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