One of the most useful components of many permanent life insurance policies is the ability to build cash value. It’s the amount of money you build on a life insurance policy above the pure cost of insurance. Whole life is another type of life insurance that has a cash value component. However, it operates in a very specific way. Below we’ll look at what whole life insurance cash value is, how it works, and when it makes sense to use it.
- What Is Whole Life Insurance Cash Value?
- How is Cash Value in Whole Life Policy Different from Cash Value in Indexed or Variable Universal Life Policy?
- How Does Whole Life Insurance Cash Value Build Over Time?
- What Can You Use Whole Life Cash Value For?
- How Do You Get Money Out of Your Whole Life Insurance Cash Value?
What Is Whole Life Insurance Cash Value?
Whole life insurance plans have two parts: the death benefit that is paid out to your beneficiaries when you pass away and the cash value. That cash value is a savings account that takes funds from a portion of your premiums. This is often why permanent life insurance plans tend to be more expensive than term life. You are paying to fund your cash value on top of the main death benefit.
Whole life insurance cash value increases at a set schedule and by a fixed rate, usually at 2%. It is not tied to direct investments or indexes the way some universal life plans are.
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How is Cash Value in Whole Life Policy Different from Cash Value in Indexed or Variable Universal Life Policy?
How cash value account is built up is the unique differentiator of a whole life policy vs. indexed or variable universal life insurance policy. It is also one of the main reasons why whole life policy is much more expensive than IUL or VUL for similar benefit.
Only whole life policy offers both guaranteed cash value. A portion of premium of a whole life policy is allocated to cash value account and it will increase by a fixed rate, usually at 2%. This provides a guaranteed cash value amount of the policy. Both indexed and variable universal policy do not offer guaranteed cash value.
In addition to that, whole life policy also offers non-guaranteed cash value amount. It is non-guaranteed because it comes from the dividend that gets paid to the policies. Since dividends are non-guaranteed, this portion is also non-guaranteed. Similar to this, the cash value in indexed and variable universal life insurance is also non-guaranteed because it depends on the performance of the indexes and the investment in the sub-accounts of the policy.
>>MORE: Is Whole Life Insurance Worth It? A Case Study
In general, indexes and investments in sub-accounts perform much better than dividend payouts. That’s the reason why non-guaranteed cash value account in indexed and variable policies is always more than that in whole life policy. If you want to maximize the cash value account of a permanent policy, you should definitely consider either indexed or variable universal policies.
>>MORE: Learn more about Cash Value Life Insurance: Everything You Need to Know
How Does Whole Life Insurance Cash Value Build Over Time?
We have a sample illustration of a whole life policy from Penn Mutual, one of the most reasonable carrier of whole life policies, for a man who started a whole life policy when he was 40 years old and living in California. He has good health and doesn’t smoke. The coverage amount is for $300,000 and he pays a monthly premium of $520 (or $6,240 a year) for 20 years. You can see how the guaranteed and non-guaranteed cash value grows over the course of the years of the policy below:
| Year of Policy | Age | Guaranteed Cash Value | Non-Guarantee Cash Value |
| 1 | 41 | $0 | $558 |
| 5 | 45 | $16,239 | $21,200 |
| 10 | 50 | $47,439 | $63,310 |
| 20 | 60 | $121,629 | $185,068 |
| 30 | 70 | $165,594 | $322,481 |
| 40 | 80 | $214,488 | $539,030 |
| 50 | 90 | $256,173 | $853,113 |
| 60 | 100 | $276,924 | $1,249,200 |
| 70 | 110 | $287,082 | $1,746,852 |
| 81 | 121 | $300,000 | $2,512,980 |
As you can see, the non-guaranteed cash value is significantly bigger than guaranteed cash value of the policy. It entirely depends on the dividend payout of the policy. Also, we should notice that the policy endows in the 81st year when the insured reach 121 years old, this is when guaranteed cash value is equal to guaranteed death benefit, which is $300,000.
>>MORE: Whole Life Insurance Calculator: Everything You Need to Know
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What Can You Use Whole Life Cash Value For?
Whole life insurance cash value comes in handy for a few purposes:
- Cash value can sometimes be put towards premiums if you are tight on money and cannot afford them for a time. These policies allow you to stop paying premiums out of pocket due to a larger cash value, which is used to pay those premiums. However, premium payments are often withdrawn from the death benefit, as well.
- You can borrow from the account in case of an emergency or to supplement retirement income. Learn more how to use withdraw from the cash value account of a life insurance policy to supplement retirement income through a case study.
- Sometimes the cash value is used as collateral for a loan, which is called a collateral assignment of life insurance.
How Do You Get Money Out of Your Whole Life Insurance Cash Value?
There are several ways to get access to your whole life insurance cash value. A few main methods are:
- Loans: You can take out a loan against the cash value. This is typical of most loans in that you have to pay interest on the loan. It’s typical to see 8 to 10 percent on loans against a cash value on a whole life policy. You must consider this option very carefully, as the interest rates can deplete the cash value faster. Also, if you do not pay the loan back, the amount you took out comes out of the death benefit. A positive is that there are no income taxes on loans as long as the policy is still in effect.
- Surrendering the policy: A more drastic way to access the cash value is to surrender the policy. You receive a cash surrender value, which is usually a portion of the cash value minus surrender charges. You have to pay income taxes on the money using this method, however.
- Selling the policy: Another option is to sell your policy to individuals or investment companies. They will take on ownership and pay premiums going forward. In return, you get a cash amount that is usually more than the surrender value and less than the death benefit.
It’s important to note that withdrawals are not allowed on whole life policies.
Another way that you may be able to access cash in a whole life policy is that mutual whole life insurance companies pay dividends to their policyholders. You can elect to receive these as tax-free cash.
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Final Thoughts
Whole life insurance cash value increases at a fixed rate and set schedule as determined by the insurer. This makes for a policy that is predictable and carries less risk than a policy that is linked to market performance. Cash value is handy if you need to access it to pay premiums, pay emergency bills, supplement retirement income or use it as loan collateral. You can access whole life cash value through loans, dividends or surrendering or selling the policy.