Whole Life Insurance And How Cash Value Works

Cash value is built into a whole life insurance policy, allowing the policy to be treated more like a long-term investment.

What is Whole Life Insurance?

Under term life insurance you pay premiums for a set number of years and the insurance expires after a set period of time, paying no benefit if you do not die during that period. In contrast, whole life insurance is just what it says it is: it remains in effect throughout your entire life, paying a guaranteed death benefit to your heirs. In addition to having a guaranteed death benefit (as long as premiums are paid) the policy also builds cash value.

How to Build Cash Value in Your Whole Life Policy

The cash value you build in your whole life policy is usually determined at the policy's inception. A portion of your monthly premium is above what is needed to cover the cost of the insurance and is used to build the value. This cash value is a critical aspect of this type of insurance policy, because you can access its value before your death, and the money paid into the account is tax deferred. You can borrow against the cash value of your life insurance without penalty and without being taxed, making it an attractive investment for many.

The cash value of your life insurance can also be used to provide collateral for a loan or as an asset to help you grow your business, as long as you remain in good health and it appears that you will be able to continue making the premium payments.

Cash Value versus Face Value

The cash value and the face value of your whole life policy are different. The face value is the amount of the death benefit that will be paid to your beneficiaries upon your death. The face value death benefit will be reduced by any outstanding loans you have taken against the cash value of the policy, as well as any unpaid premiums.

The cash value of the policy is less than the face value, often considerably less in the beginning of the policy. If you choose to cancel your policy before your death, it is the cash value you will receive, not the face value of the policy.

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