Imagine facing an unexpected financial emergency, such as a major home repair or a hefty medical bill, and then realizing you can pull money from your life insurance. That’s what life insurance policies with a cash value can be — a valuable financial tool that serves as a safety net when needed.
But what exactly is cash value in life insurance, and how does it work? What about accessing this value if you need it? Here’s a look into these questions and the best strategies for unlocking the cash value of your life insurance policy.
WHAT IS CASH VALUE IN LIFE INSURANCE?
Cash value in a life insurance policy is the savings or investment component included in certain types of life insurance policies. It’s the portion of your premium set aside in a savings or investment account. This differs from term insurance policies, which only provide a death benefit.
The accumulated amount can be accessed during your lifetime, offering a financial safety net for emergencies, investments or other needs.
HOW DOES LIFE INSURANCE CASH VALUE WORK?
Depending on your policy type, cash value grows over time through a guaranteed interest rate or investment performance. For example, say you pay $300 a month for your policy. Every month, $200 covers your premium; the other $100 goes into the cash value account.
If the account grows at a guaranteed 4% annual interest rate, after 10 years, you’d have over $14,700 in cash value (assuming no withdrawals or loans). You’ll only have paid $12,000 toward cash value at that point ($100 x 12 months x 10 years), so the extra $2,700 is what your account earned in interest.
WHAT TYPE OF LIFE INSURANCE HAS CASH VALUE?
Not all life insurance policies include a cash value component. Here are the most common types of cash-value life insurance:
1. Whole Life Insurance
Whole life insurance is one of the most popular types of insurance with a cash value. It offers guaranteed growth in your cash value account, typically at a fixed interest rate. With consistent premiums and predictable growth, whole life policies are a stable option for those seeking long-term financial security — even if the actual rate of return tends to be less than other cash-value life insurance.
2. Universal Life Insurance
Universal life insurance is more flexible than whole life insurance. It allows you to adjust your premiums and death benefits, which can affect the cash value accumulation. Depending on the policy, the cash value may grow based on a guaranteed interest rate or the performance of specific financial indexes.
If you have an indexed universal life insurance policy, your cash value is tied to a stock market index, such as the S&P 500. While there are caps and floors to limit your gains and losses, this type of policy can offer more growth potential than a traditional universal life policy.
It’s not uncommon for a universal life policy to have the minimum rate of return set at 0%. If there’s a significant market downturn, the worst that could happen is that you might not earn money in your cash value account.
3. Variable Life Insurance
Variable life insurance allows you to invest your cash value in various sub-accounts, similar to mutual funds. This type of policy offers the potential for higher returns but carries greater risk because your cash value depends on market performance.
4. Variable Universal Life Insurance
Variable universal life insurance combines characteristics of variable life insurance’s investment opportunities with universal life insurance’s flexible premiums. You can choose how your cash value is invested and adjust your premiums and death benefit as needed.
HOW TO ACCESS THE CASH VALUE OF A LIFE INSURANCE POLICY
You may be wondering, “Can I withdraw the cash value from life insurance?” Yes, using the cash value of life insurance policies involves withdrawing it from your account, borrowing against it, surrendering the policy and more. Here’s a closer look at these and other ways to access your policy’s cash value.
1. Withdrawals
Many policies allow you to withdraw the cash value you’ve contributed tax-free. This can be a quick way to access funds for emergencies or other needs. However, withdrawals may reduce your death benefit by more than what you took out because of fees your insurer charges. It could also have tax implications if you withdraw more than what you’ve directly contributed.
2. Policy Loans
You can borrow against the cash value of your life insurance policy, similar to a personal loan. Policy loans often have lower interest rates than traditional loans and don’t require a credit check. Any outstanding balance left when you die is taken from the death benefit.
3. Surrendering the Policy
If you no longer need your life insurance, you can surrender the policy and receive its cash surrender value. This amount is typically the cash value minus surrender fees and outstanding loans. Surrendering provides a lump sum of cash and terminates your coverage.
4. Life Settlements
A life settlement involves selling your life insurance policy to a third party for a lump sum payment, often higher than the cash surrender value but less than the policy’s death benefit. The buyer assumes responsibility for the premiums and becomes the policy’s beneficiary.
Life settlements can be an attractive option for policyholders who don’t need or want their coverage anymore or who can’t afford premiums. The funds from a life settlement can be used for anything, including retirement, medical expenses or other financial goals.
UNLOCKING THE VALUE IN CASH-VALUE LIFE INSURANCE
Cash value life insurance offers a unique combination of protection and savings. Whether you choose whole life, universal life or another type of policy, the cash value component can provide financial flexibility when needed. From withdrawals and loans to surrendering your policy or exploring life settlements, there are numerous ways to access your policy’s cash value.
If you’re considering a life settlement, Life Settlement Advisors can guide you through the process to get you the best value for your policy. Contact Life Settlement Advisors today to learn how you can leverage the cash value of your life insurance policy for a brighter financial future.
