The Detroit Post
Sunday, 17 October, 2021

My Life Insurance Cash Value

Ellen Grant
• Sunday, 17 October, 2021
• 9 min read

Far too many policyholders make the costly mistake of leaving behind a wad of the cash value in their permanent life policies. When the policyholder dies, his or her beneficiaries receive the death benefit, and any remaining cash value goes back to the insurance company.

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If you have accumulated sizable cash value over the life of your permanent life insurance policy and do not intend to use these funds yourself, you may choose to leave a larger death benefit to your beneficiaries. Just call your life insurance company and say you’re interested in making a trade: You’d like to increase the death benefit in exchange for the cash value on your policy.

During the trade, your objective should be to completely drain the cash value and transfer the full amount over to the death benefit or the face value. If you’ve built up a sizable cash value, you may also choose to take out a loan against your policy.

However, it’s important to note that any money you borrow, plus interest, will be deducted from the death benefit when you die. If you’re low on funds or simply want to make a large purchase, you have the option to withdraw some or all of your cash value.

If you have accumulated healthy cash value, you can use these funds in a variety of ways as an asset in your retirement portfolio. Most advisors say policyholders should give their policy at least 10 to 15 years to grow before tapping into cash value for retirement income.

And make sure the cash value is drained and redeployed later in life, so it doesn't end up with the insurer after your death. It’s pretty obvious that some life insurance companies enjoy making things confusing.

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How much it grows really depends on the type of cash value policy you buy, and what their returns are. Maybe you’re thinking you’ll have your own personal ATM that spits out cash whenever you need it.

Cash value works like this: Say you’re paying $100 a month for your cashvaluelifeinsurance policy. These investments are meant to build and make you money over time.

As we said earlier, the rates of return on your cash value investment depend on what type of cashvaluelifeinsurance you’re buying. Insurance companies will point to the cash value as a positive thing.

This percentage rate of return is set when you take out the policy, and is usually in the 2% range. Universal life insurance is different (and more complicated) when compared to whole life because it comes with “flexible” premiums and death benefits.

If you’re feeling flush, you could “overpay” your monthly premium and have the difference go into the cash value side of your policy. When it comes to how your money will build up over time, it all depends on the type of universal life insurance you have (remember when we said it was complicated?).

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Oh, and variable life insurance comes with crazy-high fees, so don’t expect to see much cash value in the first three years! Jack didn’t have to wait long for those magic beans to turn into a huge beanstalk.

With whole life : Although you may be able to cash out a portion of the dividend paid by the insurance company, you cannot use the cash value you’ve accumulated like an ATM without surrendering the policy. With universal or variable: A partial withdrawal is like getting a chunk of the death benefit early.

So, the amount you withdraw is subtracted from the death benefit payout at the end. You won’t get taxed on your withdrawal if it’s for an amount that adds up to less than what you’ve paid in premiums.

With whole life : This means you tell your insurance company you want to give up the policy and get the entire cash value you’ve built up in one lump sum. The broker who sets you up with the company buying your policy will get a cut from your settlement amount.

Plus, if your settlement is more than the total you’ve paid over the years in premiums, you’ll pay capital gains and income tax on this “profit.” With universal or variable: Selling your policy comes with similar issues to whole life.

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You’ll either slash your death benefit, face a heavy tax, or pay a fee. Getting a hold of the cash value without any consequences to you isn’t in the insurance company’s interests.

One of the worst things you can do is buy cashvaluelifeinsurance with the hopes of it helping you in retirement. In the meantime, one of the best things you can do is buy a term life policy and invest 15% of your household income into a good mutual fund or Roth IRA (an individual retirement account).

You faithfully invested your whole life only to leave all that money to the insurance company. But that’s how insurance companies make their money, and that’s why they’re so quick to sell you cashvaluelifeinsurance.

He heard that a term life insurance policy is different because it only lasts for a certain amount of time (we recommend 15–20 years). When it comes to Jack’s death benefit, term life offers almost four times as much coverage.

If he follows Dave’s advice when it comes to investing and paying off his debts, he would be self-insured by the time he reaches retirement. In recent years, more people have been buying cash value policies, so it’s even more important for us to say this loud and clear: With cashvaluelifeinsurance, you’re throwing away more of your cash while you’re still alive when you could be saving and investing it somewhere else for much more return.

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You (and your family) will be better off getting a term life policy and putting 15% of your household income into a good mutual fund or a Roth IRA. Not only will these pros help you find the right insurance policy to fit your family’s needs, but they’ll also get you the best possible price.

With different policy types, riders and head-scratching terminology (accelerated death, anyone? A cash value feature in life insurance typically earns interest or other investment gains and grows tax-deferred.

Whole life insurance offers a fixed monthly premium and a guaranteed death benefit. If you receive company dividends and pour those into your whole life insurance cash value every year you can build the account up faster.

With some types of universal life insurance you may have the option to adjust your death benefit and reduce your premiums, as long as there is enough in the cash value account to cover the costs of the policy. You cannot be rejected for guaranteed issue life insurance, but your beneficiaries won’t get the full payout if you pass away within two or three years after buying the policy (rules vary by company).

If you terminate the policy with the insurer you’ll receive the cash value amount minus any surrender charge. There is typically a surrender charge if you terminate the policy within the first several years after buying it.

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The surrender charge is a way for the insurer to cover the cost of issuing you the policy. Your loan amount will accrue interest until it’s paid back in full.

State law often dictates what the maximum policy loan interest rate can be. Some policyholders choose to use their cash value this way and intend for their beneficiaries to get a reduced payout.

If the amount you withdraw includes investment gains, often referred to as the part “above basis,” that portion is taxable. As with taking a policy loan, making a withdrawal will reduce the life insurance payout to your beneficiaries later on.

The insurance company will also subtract any unpaid premiums or outstanding loan balance. If you’re struggling to make the payments, this option could provide some relief so that you can keep the life insurance in force.

Talk with your insurance company to find out their rules for using cash value toward your premiums. Dividends can also be used to buy “paid up additions” to your life insurance policy, which will increase the death benefit amount for beneficiaries.

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Most types of life insurance have options for adding policy riders that tack on extra coverage or features. This gives you access to your own death benefit money while you’re still alive if you’re diagnosed with a terminal illness.

Similar riders for chronic illness and long-term care will also let you tap into your own death benefit if you have certain medical conditions. A primary tax perk is that your beneficiaries receive the death benefit tax-free, as with any type of life insurance.

Since life insurance payout amounts are usually pretty large, this is an important advantage. If you withdraw cash value, or take the surrender value and terminate the policy, you can be taxed on the portion of money that came from interest or investment gains.

While term life insurance is generally plenty of coverage for most people, cashvaluelifeinsurance is useful under a few circumstances. The premiums can be much higher than the same amount of term life insurance because of the cash value feature and policy fees.

Some high net-worth individuals use cash value policies to help their heirs pay estate taxes. Because some policies take a long time to build up any significant cash value, you could wait decades before you have a substantial amount to access.


Your beneficiaries receive the policy’s death benefit amount, minus any loans and withdrawals of cash value you made. Some companies offer the option for beneficiaries to receive the death benefit plus cash value, for higher premium payments.

It doesn’t offer a cash value component but it will pay out a death benefit amount of your choosing if you pass away during the policy’s term, such as 10, 20 or 30 years. And it won’t cost you an arm and a leg like some forms of permanent life insurance.

If you don’t need insurance for the duration of your life, term life insurance will give you more bang for your buck. While cashvaluelifeinsurance may seem enticing, it doesn’t make sense to pay the higher price tag if you don’t need insurance indefinitely.

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