What is cash value in life insurance?

Cash value is a savings or investment component built into permanent life insurance policies, including whole life, universal life, and variable life. A portion of each premium you pay goes into this cash value account, which grows tax-deferred over the life of the policy. You can access the cash value during your lifetime through loans, withdrawals, or by surrendering the policy.

How cash value grows

The growth mechanism depends on the type of policy:

• Whole life: Cash value grows at a guaranteed rate set by the insurer. Many mutual companies also pay dividends that can be added to the cash value.
• Universal life: Cash value earns interest based on a declared rate, with a guaranteed minimum floor.
• Indexed universal life: Growth is linked to a stock market index, with caps and floors that limit both gains and losses.
• Variable life: Cash value is invested in sub-accounts similar to mutual funds, with the potential for higher returns and real risk of loss.

In all cases, growth is tax-deferred, meaning you do not pay taxes on the gains as long as they stay inside the policy.

How you can access cash value

• Policy loans: Borrow against your cash value at an interest rate set by the insurer. No credit check is needed. Unpaid loans reduce the death benefit.
• Withdrawals: Take money out directly. Withdrawals up to your cost basis (total premiums paid) are generally tax-free. Withdrawals beyond that may be taxable and reduce the death benefit.
• Surrender: Cancel the policy and receive the accumulated cash value minus any surrender charges. This terminates the death benefit.

What happens to cash value when you die

This surprises many policyholders: with most policies, the cash value does not pass to your beneficiaries in addition to the death benefit. Your beneficiaries receive the death benefit, and the insurer keeps the cash value. Some policies offer a rider that adds the cash value to the death benefit, but it comes at an additional cost.

What Truscott recommends

Cash value can be a useful financial tool, but it is important to understand how it actually works within your specific policy. Growth projections in illustrations are not guarantees. A Truscott coverage review will show you your policy's current cash value, how it is projected to grow under guaranteed versus non-guaranteed assumptions, and whether accessing it makes sense for your situation. Schedule a review for a clear picture.