What You Need To Know About Cash Value in Life Insurance

Life insurance has long been sold as protection for the people you leave behind, but some policies also serve as a living financial tool. If you have a life insurance policy with a savings component, you may be able to tap into some of its value while you’re still alive.  

Cash value in life insurance can provide more flexibility than basic coverage, but there are a few details you need to understand before dipping into the funds. Understanding how your policy’s cash value works can help you make better decisions about your coverage and avoid surprises later. 

What Is Cash Value in Life Insurance? 

Cash value is found in certain types of permanent life insurance plans, including whole life and universal life policies. Unlike term life insurance, which provides coverage for a set period without building value, a permanent policy can build cash value over time.

When you own one of these policies, part of your premium goes toward the cost of your insurance and policy expenses, while the rest goes toward building cash value. That account balance grows over time in line with the policy terms.

The cash value of life insurance and the death benefit aren’t necessarily the same. The death benefit is the amount designated for your beneficiaries when you die, assuming the policy remains in force. Cash value is an asset associated with the policy that you may be able to access while you are alive.

How Does Cash Value Grow?

Cash value growth depends on the type of policy you own. Whole life policies generally have a more predictable approach to cash value accumulation. Universal life policies can offer more flexibility, with some tying growth to market performance or an index.

That means different policies grow at different rates based on premiums, policy expenses, interest credits, investment performance, and other terms. Regardless of plan and terms, cash value in life insurance takes time to build. A newer policy may have a relatively small cash value even if premiums have been paid consistently.  

This is one reason why it’s important to understand how life insurance works when reviewing a policy. Looking only at how much you pay each month does not tell the whole story. At first, a larger portion of your premium will likely go toward fees and the cost of coverage rather than savings. Over time, though, the balance starts to grow.

Using the Cash Value of Your Life Insurance Policy  

Depending on your policy, you may be able to withdraw some of the cash value or take out a loan using the policy as collateral.

However, withdrawals reduce the cash value and, depending on the policy, may also reduce the death benefit. Some companies offer policy loans that let you access money without a traditional loan application. Because they’re loans, they accrue interest while you pay them back, and an unpaid balance can reduce the amount your beneficiaries receive from the policy.

That’s why it’s worth checking your policy’s terms before accessing the money. What sounds like a simple withdrawal or loan could affect your coverage more than you expect.

You can also surrender the policy. If you decide you no longer need or want the policy, you can cancel it and collect the surrender value, which is your cash value minus any surrender charges. Once you do, coverage ends completely, and no death benefit remains for anyone to claim.

How the Cash Value and Death Benefit Work Together

You might assume that if a policy has a $100,000 death benefit and $20,000 in cash value, your beneficiaries will eventually receive $120,000. That’s generally not how these policies work.

The cash value typically belongs to the policy while the policyholder is alive. When the insured passes, the beneficiaries generally receive the policy’s death benefit, subject to the policy’s terms and any outstanding loans or other adjustments. The accumulated cash value does not automatically get added to the death benefit unless this is specified in the terms.

Cash Value Can Be Useful, But It’s Not Free Money

Cash value in life insurance can provide valuable financial flexibility. Some policyholders use it later in life for expenses, retirement planning, or other financial needs. Accessing this money without needing to sell another asset can be appealing.

However, these policies cost more than term coverage for the same death benefit amount. For some households, that premium is worth it because it forces disciplined saving alongside protection. For others, buying cheaper term coverage and investing the difference elsewhere makes more financial sense.

How To Read Your Life Insurance Policy Statement

Your insurance carrier will typically send an annual statement showing your policy’s current cash value, surrender value, and death benefit. Because these numbers are different, it’s easy to get confused about what you actually have and what your beneficiaries could receive after your death.

To help you understand:

• The death benefit is what your beneficiaries will receive when you pass away. 
• Policy cash value is the amount of money that has accumulated in the policy. 
• Surrender value is what you’d receive if you cancel the policy. 

It’s a good idea to check your statements to confirm that the policy still meets your needs. Review the current cash value and how your policy’s cash value growth is projected to change over time, as that can help you make better decisions going forward.  

Get More From the Coverage You Already Have With Help From Union Risk Services

Cash value in life insurance can be a useful part of a long-term financial plan, but its benefits depend on how the policy is structured and how you use it. 

If you have questions about your coverage or want help understanding your policy, Union Risk Services can help you better understand your options. Call (718) 370-3131 to discuss your life insurance needs and get a clearer picture of how your policy works. 

If you’re a business owner looking for additional coverage, we can also explain how corporate-owned life insurance works to help you explore options for providing your employees with additional insurance.