When it comes to Life Insurance policies, what does Cash Value mean?

Question

When it comes to Life Insurance policies, what does Cash Value mean?

Answer 1

Permanent life insurance is a unique financial product in that it provides death benefit protection along with the potential for attractive tax advantages. These tax advantages often get overlooked.

The primary purpose of life insurance is to provide a death benefit to help replace lost income and protect loved ones from financial losses that result from the insured's death.

Life Insurance Basics: There are two general categories or types of life insurance. One is term insurance, which provides "pure" insurance protection. It pays a death benefit to beneficiaries if the insured dies during the term the policy is in force. If the insured lives, the policy expires without value at the end of the term. In most cases, the policy can be renewed for an additional term, for a much higher premium.

The second type of life insurance policy is known as "cash value" or "permanent" life insurance. These policies include whole life and universal life, among others. A cash value policy is generally designed to provide long-term life insurance coverage, generally for the insured's entire life.

It also features a level premium and the opportunity to accumulate cash value. Permanent life insurance is designed to help pay for the death benefit protection in the insured's later years by keeping the premiums level for the life of the policy (unlike term insurance), and assuring that death benefit protection does not become prohibitively expensive in the insured's later years. The cash value is available to the policyowner through policy loans and other options, which reduce the death benefit.

The Advantages / Tax benefits of life insurance are:

You pay NO current income tax on interest or other earnings credited to cash value. As the cash value accumulates, it is not subject to current taxation.

You pay NO income tax if you borrow cash value from the policy through loans. Generally, loans are treated as debts, not taxable distributions. This can give you virtually unlimited access to cash value on a tax-advantaged basis. Also, these loans need not be repaid. After a sizable amount of cash value has built up, it can be borrowed against systematically to help supplement retirement income and in many cases, never pay one cent of income tax on the gain.

Several cautions regarding policy loans: First, loans are charged interest and policy loans can reduce the overall value of the policy. Second, the cash value is potentially subject to income taxes when there is a withdrawal from or surrender of the policy, or if a certain ratio of death benefit to cash value is not maintained. Third, if the policy is a modified endowment contract, the loan may be taxable.

Your heirs pay NO income tax on proceeds. Your beneficiaries receive death benefits completely free of income taxation. Therefore, a $500,000 policy delivers $500,000 in benefits with no deductions and no withholding required. Note: This is true with all life insurance policies, both term and cash value.

You can avoid potential estate taxes and probate costs on policy proceeds, as long as the beneficiary designations and policy ownership are arranged in accordance with current law. For instance, if you (A) own your policy at the time of your death or (B) make your estate the beneficiary, the policy proceeds will generally be included in your estate at death. This can increase the value of your estate, triggering estate taxes.

This situation may be avoided, however, by placing ownership and naming beneficiaries outside your estate. If structured properly, the policy proceeds will not be included in your estate. However, to avoid estate inclusion for existing policies, the policy must be transferred more than three years before your death.

For more information about these and other benefits of cash value life insurance, as well as details about the best way to arrange your policy beneficiary and ownership designations, you should consult your attorney and a licensed life insurance agent or broker.

Answer 2

that you are getting ripped off.  Stick with term life.

Answer 3

That part of your money/premiums that you pay each month goes into a "savings account." Look at it this way- even in a bank savings account, you money accumulates interest from the beginning, in an insurance policy it'll take till the 2 year BEFORE it makes any interest. In a bank account, it'll make about 3-4% interest; in the policy it'll be about 1-4%- AFTER all fees and commissions have been taken out. In a bank, you can withdraw as much or as litlle as you want WITHOUT paying it back; but with cash value, you can get your money out but if you take it all you have no insurance or you pay back your own money but pay interest to the company for "allowing" you to take out your own money. When you die, your family gets the oney in the bank; with insurance your family can choose between face amount of policy or cash value, which will usually be much less. If they choose face amount, the company KEEPS the cash value. You can choose for your family to receive both but you will pay a higher premium.

Insurance.biz,   Primerica is the only term insurance that GUARANTEES renewability WITHOUT a medical checkup. Just this past sept I helped friends of mine renew their policies they had with us. Neither one had to get a medical check and he had had a heart attack in last five years. We increased her, because she was going back to work therefore she had to get a medical checkup for the increase amount. Know whereof you speak. We see many cash value policies. In fact we change them be cause they are ripping our friends and family off. The most important years for ANY investment is the first 2-5 years. And cash value policies DO NOT have money in them for these first crucial years. Look at your policy descriptions. We do. That is how we convert your policies to ours.

Answer 4

Early in the life of a whole life or universal life insurance policy, the cost of insuring against your premature death is much less than the premium amount. The insurance company deposits the excess amount—less the company’s profits and fees—into a tax-deferred savings account. This amount is known as “cash value.” These funds are invested by the insurance company. Some of the proceeds from the investments are credited to the account, increasing the cash value. These funds are available to you in the form of a loan or as a withdrawal. If you cancel the policy, you receives the cash value as the policy “surrender amount.”

Answer 5

LOL  I agree on the ripped off part.

Cash value, is part of the OVERPAYMENT you made for insurance.  You can borrow this from the insurance company, and pay them interest (your money, that you borrow back, but THEY keep the interest).  And if you die, they keep the cash value.  And if you die with a loan outstanding, they subtract the loan amount from the face value of the policy.

It's "investing" and "savings" for people who are really bad at math.

Answer 6

Cash Surrender Value is the part of a policy that accumulates money that you can borrow against.  It earns typically around 2-4% and you can borrow it at about 8%.  Keep in mind, this is YOUR money you are borrowing, but is it not your account that it is going into.

It is often used by the insurance company to prevent them having to pay a full death benefit since they typically keep it.

For about 99% of the population, it means the agent that sold it to got a nice fat commission check.

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In response to Insurance Made Easy.biz.

If the person dies before the policy expires in a traditional cash surrender value policy, they only get the 100k (using your examples).  With BTID, they would get the 100k PLUS the $56k in the separate account.

You also miss the point where if someone is saving for retirement, builds the reserves as well for emergency funds and final expenses, they have no need for life insurance.  The whole point of life insurance is to cover expenses related to an untimely death while you build your retirement.  Not to give them money when you die.

You also neglect to mention that there are term policies than can be renew to level term policies without proving insurability that still come out cheeper than buying a cash surrender value policy.  This can be done to age 100.  I have found that most agents that favor CSV policies don't educate their clients on the purpose of insurance.  Or they don't help the wealthy properly allocate their assets to avoid the estate taxes.

Answer 7

Your "cash value" in a whole life policy or "cash surrender value" in a universal life policy represents your liquidity at any given time.  The cash value is also used for certain internal calculations.  Because of this, accessing the cash value, whether by loan or withdrawal, usually affects your policy.

Richie, Easy, Catz: Let's cool the squabble and focus on the question.  Most of the discussion is not relevant, and some of it is incorrect.

Mark: You're flat wrong about Primerica being the only one with guaranteed renewability.  Remember, when you make absolute statements about one company, you are  representing ALL other companies.  Unless you represent all companies, take a compliance chill pill.

Answer 8

Cash Value Life Insurance is a policy that combines the insurance protection  &  investment as one. The monthly premium you pay will be split in 2. For example $100/month policy only about $30/month goes to the protection part, the rest goes into your cash value account. What they don't tell you is that their are fees and expenvises that will take from the cash value account. The first 2- 5 years you will have nothing in the account and when the money does start growing it is at a low 5 - 7% ROR. If you borrow it, you will pay interest on YOUR money to the insurance company. Your family may or may not receive the money in the Cash Value account at your death, depending on how it is setup. But your paying more monthly to get both the coverage and the cash value.

As a finanical coach and owner of my own term policy. I recommend term 100% of the time so far. I have yet to see where any cash value life insurance was a better option than term. I invest into mutual funds at 10 - 12% over the past 50 - 70 years

Answer 9

Cash value life Insurance

A life insurance policy which in addition to providing a benefit upon the death of the policy holder, also accumulates cash value over time enabling benefits to be paid out before death.

For someone here to tell that cash value life insurance is a rip off or to compare the cash value to a savings account is like comparing a money market fund to an aggressive growth fund.  The money market will earn way less than the growth fund but does that mean the money market is a rip off?  No they are different vehicles with different objectives.

Cash Life Insurance is the only way you can guarantee a death benefit to your beneficiary for your entire lifetime whether you die next week or at age 95.

The cash value is part of your death benefit and is the only way the insurance company can keep your premiums level for your entire lifetime. Look at it like this you and the insurance company work together to make sure your beneficiaries get the full death benefit. If you die early the insurance company pays the full death benefit. If you die later in life your beneficiary gets your cash value (for this let’s say 60k on a 100k policy) and the insurance company will make up the difference giving your beneficiary 40K for a total of 100K.

The cash value is not an investment and it should never be sold as an investment.

For example let’s look at a 30 year old male

100K cash value universal life insurance.

Premium $38.23 per month

Cash value at age 60 $16,681

Cash value at age 100 $99,672

Total cost of policy if you live to age 100 $32,109

People love to say buy term and invest the difference, let’s take a look.

Term insurance is cheaper but at the end of the term you take the risk of being uninsurable. If you still need life insurance too bad.

30 Year level term 100K cost $13.13 per month

Value in 30 years if alive zero

Total cost over 30 years $4,726.80

Difference to invest $25.07 (cost of cash value $38.23 minus the cost of the term $13.13)

$25.07 invested monthly for 30 years at 10% return = $56,670.43

In this example If you die in the first 30 years of the term you get 100K and the investment. I fyou die in year 31 your beneficiary is left with the investment and no life insurance.

With all that said most people could use a mixture of cash value and term insurance. For example a family with young children may want to insure the life of the main income provider to pay of the house, provide college funds etc. This family could use 80-90% term coverage and 10-20 % cash value. Once the kids are grown and gone the term would expire and they would be left with a small cash value policy.

Richie R

In traditional cash value the client has the choice death benefit plus cash or death benefit only. If they choose death and cash they are just buying more insurance.

But remember the point of life insurance is not the cash value. The premium is level because the cash value is part of the death benefit. The cash value is how the insurance company is able to keep the premium level. The cash value is pleasant side effect.

In my example above with real numbers the client must decide if they want to take the term and invest if so the take risk of dying in year 31 without insurance and with less than 100K in assets.

I would also love to hear about these term policies that can be renewed without evidence of insurability please send me some info. Your telling me an insurance company will just give away a policy to someone that is dying, never heard of it.

Please share this with me.

I do sell way more term than cash value, but cash value does have its place and on Y!A people tend to express opinion instead of fact. Comparing life insurance to investments is ridiculous. Why not compare what you spend on health insurance, surely most people could invest that money and have more than enough to pay their medical bills. In fact 90% of people with health insurance get less than $1,000 in benefits per year. But wait someone might get sick and have thousands in medical bills good thing this can't happen after their term expires.

Mbcratz, life insurance is not investing or savings it is insurance. 21 years in the business and you call life insurance " savings and investing"? I don't get it.