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Understanding "Cash Value" Policies

Permanent (whole life) insurance policies offer as part of their benefits package a form of savings account which retains a portion of the premium as an investment.

The savings portion can be accessed almost anytime for any reason, making it an interesting investing vehicle, to go along with the protection aspect of the policy itself.

This page:

Explains how the cash-value part of a permanent policy works.

Discusses the major benefits and drawbacks of choosing this option.

Links to in-depth info on the types of policies that offer a cash-value portion.

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The "Cash-Value" Part Of Permanent Plans

Permanent life insurance is in some ways more like an investment than an insurance policy. Premiums on a permanent policy cover more than the actual cost of the policy, and the extra amount supplements a savings account in your name. This additional money accumulates in your account and is invested by the insurance company.

The "cash value" portion of your policy refers to this invested money and its earnings. Your account continues to increase and to earn money until your policy is redeemed. At this point, depending on the type of policy you have, the cash-value is either surrendered to the insurance company or included in the death benefit.

But the cash value portion of a permanent life insurance policy is more than just a tool to gradually increase the death benefit until your death. You have access to the money at any time during your life, so it can be used to cover an expense you might otherwise not be able to afford.

There are a couple of ways to use the "cash value" portion of your policy:

One way is to ask for a low interest rate loan from your insurance company, using the cash-value account as a guarantee. If you choose to pay off the loan, your death benefit will be reinstated as the initial face value of the policy (plus the entire cash-value amount earned while owning the policy, if you have requested that option). If you choose to pay off the loan, the death benefit is reduced, usually by the amount of the loan.

The second option is to request the policy's cash-value to be surrendered or partially surrendered to you. Surrendering your policy is another name for terminating it. Fully surrendering it means the death benefit plus any cash value accumulation will be paid to you and the contract between you and the insurance company is ended. If you choose to partially surrender the policy, only a portion of the death benefit and cash value will be paid to you. Other aspect of the policy may be adjusted.

Not every insurance company allows you to partially surrender your policy, and often the ones that do only allow it under extreme circumstances. Be sure to read the policy document very carefully before signing it, so as to avoid any possible nasty surprises later on.

How the cash value portion of your policy is managed is the basis for the major distinctions between types of permanent life insurance.

We have a detailed look at each of the three most common ones, starting with standard whole life, which is the simplest to buy, because all of the cash-value investment portion is managed by the insurers.

Choosing a permanent policy can be tricky. Deciding on how to manage its cash-value aspect is one of the biggest decisions, because it involves settling on the actual risk level you are comfortable with.

We recommend that you use one of our partner carriers to compare various insurers and to get more advice about what policy to select.

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