Life insurance cash value is a feature of permanent life insurance policies such as whole life and universal life insurance. Under these policies, the life insurance company invests some of your premiums on your behalf to accrue capital.
Unlike a death benefit, cash value is a living benefit, because you can access the cash value of a permanent life insurance policy while you are alive. Don't confuse cash value life insurance with return of premium life insurance, which is an optional benefit on a term insurance policy that returns all or a portion of the premium payments if you are still living at the end of the policy term.
How does cash value of life insurance work?
When you pay into your cash value life insurance policy, the life insurance company divides that premium into several parts. One part goes towards paying your death benefit. The other covers the insurance company's fees. The final part funds the cash value. It generates interest or market returns.
How long does it take to build cash value on life insurance?
Cash value on a life insurance policy often accumulates slowly. Only part of each premium payment goes into cash value, although this portion is often higher earlier on in the policy.
How is cash value shown?
You can usually see the cash value of your life insurance policy, together with your surrender cash value, on your statement. The two might be different if the insurance company charges a surrender fee on the policy.
What happens when you take cash value from life insurance?
Each method of extracting cash value from your policy has different ramifications. Cash value on a life insurance policy isn't taxed while it accrues, but you could be taxed when making a withdrawal in some cases. The exact amount depends on the amount of the withdrawal relative to the total premiums paid.
Making withdrawals from your policy will also reduce the policy's death benefit, which will negatively affect your beneficiary's payout amount. It's also important to remember that unpaid policy loans will have the same effect.
Now that you have information about the cash value of life insurance, learn more about your life insurance options.