Whole life insurance policies come with a cash value component that grows over time as you pay premiums. The cash value accumulation is invested in a conservative-yield investment by the insurance company, and the rate of return can be fixed or variable based on the policy type. While the cash value can be used for various purposes, it reduces the death benefit of the policy when withdrawn.
How Cash Value Accumulation Works
A portion of your premium payment covers the policy’s death benefit, operating costs, and profits of the insurance company, while the rest is allotted to the policy’s cash value. The cash value doesn’t accrue for the first few years, and the percentage of the premium that goes toward cash value decreases over time. The cash value accumulation and risk vary depending on the policy type.
For example, in a whole life policy with a fixed death benefit, the cash value accumulation is guaranteed and poses the least risk. However, variable life policies are more risky as they depend on the performance of an asset. The cash value accumulation slows down as you grow older, and the cost of insurance increases, reducing the cash value growth rate.
Using the Cash Value
The cash value can be used to pay premiums, take out loans, or withdraw funds. However, withdrawing cash value reduces the death benefit of the policy, and taking out loans can increase the interest rate. It’s crucial to consult an insurance advisor and understand the policy’s terms and conditions before using the cash value.
Example of Cash Value Accumulation
Assuming a fixed $1 million death benefit whole life policy, paying a monthly premium of $1,562, the cash value accumulation over 30 years is shown below:
|Age||Cash Value||Death Benefit|
As you grow older, the cash value accumulation slows down, and the cost of insurance increases, reducing the cash value growth rate. When you withdraw the cash value, it reduces the death benefit, and the remaining amount must cover the policy’s insurance costs.
Whole life insurance policies with cash value accumulation can provide a guaranteed cash value growth rate, but the risk and cash value accumulation vary depending on the policy type. It’s important to understand the policy’s terms and conditions and consult an insurance advisor before using the cash value.
- Investopedia. How Cash Value Builds In A Life Insurance Policy
- Collins Dictionary. Cash Value Life Insurance: Types & Benefits
- Adobe. Whole Life Insurance Definition: How It Works, With ...
- Cambridge University Press. What Is Whole Life Insurance? (& How To Get It)
- Lincoln Heritage Life Insurance Company. What Is Whole Life Insurance?