When you pay your insurance premiums, a certain percentage goes into a tax-deferred savings component, known as the cash value. It is a feature of permanent life insurance applied in several types of policies, such as universal life insurance or whole life insurance. Term life policies do not have built-in cash value.
Contrary to what many people believe, the cash value is separate from the death benefit. While your beneficiaries are guaranteed to receive the death benefit when you pass away, the cash value component can only be used while you are alive. This means that you should not let the cash value accumulate without deciding how to use it.
In short, the cash value of a policy can be considered an investment, since it represents the portion of your policy that earns interest. Depending on the type of life insurance you bought, these are the main five ways you can use your cash value:
Use it to pay your policy. Some cash value life insurance policies allow you to use the cash value to pay your premiums.
Take out a loan. Policy loans enable you to withdraw tax-free money from the cash value account to use however you prefer.
Make a withdrawal. Depending on your policy, you may be able to make a tax-free withdrawal from your life insurance policy.
Boost your death benefit. Some insurance companies may allow you to increase your death benefit in exchange for your policy’s cash value.
Surrender your life insurance policy. If you cancel your policy, you can receive money equal to the cash surrender value. Just keep in mind that you will probably be charged surrender fees, which could greatly reduce your cash value.
A life insurance’s cash value can bring you a lot of benefits. It can pay down debts, cover expenses, or even increase your death benefit. Just keep in mind that, to collect these benefits, you must use your cash value while you are alive.