how cash value life insurance works
cash value insurance is permanent life insurance because it provides coverage for the policyholder s life usually cash value life insurance has higher premiums than term life insurance because of the cash value element a portion of each premium payment is allocated to the cost of insurance and the remainder deposited into a cash value account 2the cash value of life insurance earns interest and taxes are deferred on the accumulated earnings while premiums are paid and interest accrues the cash value builds over time as the life insurance cash value increases the insurance company s risk decreases because the accumulated cash value offsets part of the insurer s liability example of cash value life insuranceconsider a policy with a 25 000 death benefit the policy has no outstanding loans or prior cash withdrawals and an accumulated cash value of 5 000 upon the death of the policyholder the insurance company pays the full death benefit of 25 000 money accumulated in the cash value becomes the property of the insurer because the cash value is 5 000 the real liability cost to the life insurance company is 20 000 25 000 5 000 whole life variable life and universal life insurance are all examples of cash value life insurance term insurance is not cash value insurance accessing the cash value of life insurancethe cash value component serves as a living benefit for policyholders from which they may access funds there are several ways to do that for most policies partial surrenders or withdrawals are permissible though these reduce the death benefit some policies allow for unlimited withdrawals while others restrict how many draws can be taken during a term or calendar year some policies limit the amounts available for removal e g a maximum of 500 if you withdraw more than the amount you ve paid into the cash value that portion will be taxed as ordinary income 2most cash value life insurance arrangements allow for policy loans from the cash value as with any other loan the issuer will charge interest on the outstanding principal the outstanding loan amount will reduce the death benefit dollar for dollar in the event of the death of the policyholder before full repayment of the loan 2cash value may also be used to pay policy premiums if there is a sufficient amount a policyholder can stop paying premiums out of pocket and have the cash value account cover the payment 