If you have cash-value life insurance and pass away, the life insurance company will pay out the death benefit of the policy and absorb the cash value. Because a life insurance policy’s cash value can only be used by the policyholder while they are still alive, your beneficiaries won’t receive any of it. Beneficiaries are not given the financial value. Some life insurance plans, however, let you expand the death benefit as the cash value increases.
Before including cash value life insurance in your financial strategy, it’s crucial to speak with a financial counselor because it might be confusing.
Cash Value: What Is It?
Term life and permanent life insurance are the two most common types.
Term life insurance is only effective for a specific amount of time, often 20 years. The payout, or death benefit, that your beneficiaries get following your passing constitutes the value of term life insurance. There isn’t another monetary benefit.
Depending on the coverage, permanent life insurance covers you until age 99. There is a financial value in permanent life insurance. A portion of your premium payments for this cash value life insurance are deposited into a cash value account, where they accrue tax-deferred interest at a rate guaranteed by the insurance company (often 1% to 2%). In the end, the cash value of your policy may match or exceed its face value.
What can you do with the cash value of your insurance policy? Depending on the conditions of your insurance coverage, you can have a few choices:
- Borrow from it whenever you require cash.
- Give up the policy and receive the cash value.
- Pay the insurance premiums using the cash value.
- Increase your death benefit by using it.
Naturally, you can also allow the monetary value to increase. Just be aware that the cash value usually goes back to the insurance provider, not your heirs, upon your passing. What is the cash value process?
You can withdraw money or borrow against the cash value while you’re still living. You can pay your premiums using the cash value as well. It takes years for the cash account to build up enough value to be “paid up,” so you have to wait.
The penalty of all of this is that if you borrow against cash value, you must pay interest when you pay back the loan. If you choose to withdraw the funds from the loan and choose not to pay it back, the death benefit will be reduced by the loan balance plus interest. In some circumstances, the death benefit may be lost if more than the withdrawal amount plus interest is subtracted.
The death benefit for your beneficiaries would be lessened if there are any unpaid loans when you pass away. Any withdrawals that are not related to loans will also be taxed at your standard income tax rate.
What occurs to your whole life insurance policy’s cash value after your passing?
Any residual cash value in your life insurance policy is returned to the insurance provider after you pass away. Years of premiums have been lost if the money invested in the cash value has not been used.
On the other side, if you did spend your policy’s cash value, it might affect how much money your beneficiaries get. For instance, if you borrowed money against the cash value of your policy and didn’t repay it, the insurance company will take that amount out of the death benefit, along with interest.
A financial counselor should be consulted regarding the effects of a cash value life insurance policy on your financial and estate plans prior to enrolling in one.
When do recipients receive the death benefit and monetary value?
The monetary value is often only usable while the policyholder is still alive. Even after your death, your beneficiaries will not be able to access the cash value because it remains entirely independent from the death benefit.
Beneficiaries may use the cash value of your policy in one situation—if you bought paid-up supplemental insurance. A rider that enables the death benefit to rise along with the cash value is paid-up supplementary insurance. You must ask your insurance if you have access to this rider because it is not frequently offered.
For those with high salaries, cash value policies can be a crucial financial planning tool, but they don’t give money to your beneficiaries when you pass away. If you purchased life insurance to offer financial support for your family, you need carefully arrange your finances and make sure that the cash value of your policy doesn’t reduce the death benefit.
Has the death benefit been affected by the monetary value?
A whole life insurance policy typically pays out exactly like any other life insurance policy does after the insured passes away. After filing a claim, the beneficiaries are given the death benefit to use as they see proper.
The overall death benefit will, however, be reduced by the sum of any borrowed versus the cash value that was never repaid. Furthermore, the death benefit given out will be reduced by the amount you removed from the cash value.
The death benefit of your policy will stay steady, and your beneficiaries will get the entire lump sum if you choose to leave the cash value alone.
The Best Way to Find Your Cash Value
You can have various options for accessing your cash value, depending on your particular insurance coverage.
Take money out. As long as the amount removed doesn’t exceed the total amount of premiums paid so far, you can normally withdraw money from the cash value in your life insurance policy without having to pay taxes on it. In order to pay off your mortgage, cover a child’s education expenses, or cover nursing home care as you get older, you could take cash value.
Give up the policy. The policy is canceled if the whole cash value is withdrawn. This process is known as policy surrender. If your beneficiary has passed away or no longer requires the death benefit, you might opt to surrender the policy. The sum of your premium payments plus any interest that has accrued on the policy, less any unpaid debts or outstanding premiums, is the cash surrender value. On the cash surrender value, you can additionally be required to pay surrender fees or income taxes.
Obtain a loan. When you take out a loan against the cash value of your own insurance policy, a credit check is not necessary. You aren’t even required to pay back the loan. However, interest is still accumulating; if it surpasses your cash worth, your policy may expire. Be aware that your death benefit will be reduced by any unpaid loans, interest, and fees, which will decrease the amount your beneficiaries receive.
Pay your insurance premiums with it. Your ability to use your cash worth to pay your insurance premiums may become available if it reaches a certain level. You can invest the money you would have used to pay the premiums, possibly earning a greater return than your life insurance coverage. Just keep an eye on your cash value; if it drops below the point where it can no longer pay your premiums, your policy may expire.
Increase your death benefit by using it. You may be able to exchange your cash value for a higher death benefit under certain permanent life insurance policies. This could be a way to leave more money to your loved ones if you don’t need the cash value of your policy for yourself.
What Is the Value of Cash Value Life Insurance?
It could seem like a simple method to gain money to purchase life insurance with cash value. However, cash value life insurance is up to 15 times more expensive than term life insurance. It takes time to accumulate cash worth; borrowing or taking that money could lower the death benefit to your beneficiaries or result in income taxes. Last but not least, investment in a 401(k) or IRA will typically yield higher returns on cash value than does investing in a life insurance policy. You would be better to invest the funds you would have spent on cash value premiums and buy term life insurance instead.
If all other investment options have been exhausted, cash value life insurance can make sense. You can decide how a cash value life insurance policy might fit into your long-term financial objectives by speaking with a financial expert. Also think about registering for Experian’s free credit monitoring service. Your plan for a safe retirement should include maintaining a solid credit score.