What Is Cash Value Life Insurance And How Does It Grow Over Time?

 

Life insurance is a vital financial tool that can protect your loved ones from the unexpected loss of your income. But not all life insurance policies are created equal. Some policies offer more than just a death benefit; they also feature a cash value component that can serve as a savings or investment account.

Cash value life insurance is a form of permanent life insurance that lasts for your entire life, as long as you pay the premiums. Unlike term life insurance, which only provides coverage for a specific period of time, cash value life insurance also accumulates cash value over time. This cash value can be used for various purposes, such as borrowing or withdrawing cash from it, or using it to pay policy premiums.

There are different types of cash value life insurance policies, each with its own advantages and disadvantages. Some of the most common ones are whole life, universal life, and variable life insurance. In this article, we will explain how cash value life insurance works and how it grows over time. We will also help you choose the right cash value life insurance policy for your needs and goals.

How Cash Value Life Insurance Works

When you buy a cash value life insurance policy, you pay a premium to the insurance company. The premium is divided into three parts: the cost of insurance, the cash value account, and the insurer’s fees and charges.

The cost of insurance is the amount that the insurer charges to provide the death benefit to your beneficiaries in case you die. The cost of insurance depends on factors such as your age, health, gender, and the amount of coverage you want.

The cash value account is the part of the premium that goes into a savings or investment account within the policy. The cash value account earns interest or investment gains and grows tax-deferred. This means that you don’t have to pay taxes on the earnings until you withdraw them from the policy.

The insurer’s fees and charges are the expenses that the insurer incurs to administer and manage the policy. These include commissions, administrative costs, mortality and expense charges, etc.

As you pay premiums and interest accrues, the cash value builds over time. The cash value also reduces the insurer’s risk and liability over time. This is because the cash value offsets part of the death benefit that the insurer has to pay if you die. For example, if your policy has a $100,000 death benefit and a $20,000 cash value, the insurer’s net liability is only $80,000.

One of the benefits of cash value life insurance is that you can access the cash value in various ways. You can borrow against it, withdraw from it, or surrender the policy for it. However, each of these options has its pros and cons.

• Borrowing against the cash value: You can take out a loan from your policy’s cash value at a low interest rate. The loan does not affect your credit score or tax liability. However, the loan reduces your death benefit by the amount of the loan plus interest until you repay it. If you die before repaying the loan, your beneficiaries will receive a reduced death benefit.
• Withdrawing from the cash value: You can withdraw money from your policy’s cash value up to the amount of premiums you have paid into it. The withdrawal does not affect your tax liability or your death benefit. However, if you withdraw more than the amount of premiums you have paid, the excess amount will be taxed as ordinary income.
• Surrendering the policy for the cash value: You can cancel your policy and receive its cash value in a lump sum. The surrender does not affect your credit score or tax liability up to the amount of premiums you have paid. However, if you surrender your policy before it matures or before you reach a certain age (usually 65), you may have to pay a surrender charge or penalty. Also, you will lose your coverage and forfeit any remaining death benefit.

How Cash Value Life Insurance Grows Over Time

Different types of cash value life insurance policies have different rates and methods of growth for their cash value accounts. Some policies offer a fixed rate of growth, while others offer variable or flexible rates based on market performance or other factors.

Here are some examples of how different types of cash value life insurance policies grow their cash value over time:

• Whole life insurance: Whole life insurance offers a fixed monthly premium, a fixed rate of growth for your cash value, and a guaranteed death benefit amount. The rate of growth is usually lower than other types of policies but more stable and predictable. The insurer determines the rate based on its investment returns and dividends (if any). For example, if your whole life policy has a 4% annual interest rate for its cash value account, your cash value will grow by 4% every year, regardless of market conditions.
• Universal life insurance: Universal life insurance offers a flexible premium, a variable rate of growth for your cash value, and a flexible death benefit amount. The rate of growth is usually higher than whole life but more volatile and uncertain. The insurer determines the rate based on a benchmark index or a portfolio of investments. You can also adjust the amount of premium you pay and the amount of death benefit you want, as long as you meet the minimum requirements. For example, if your universal life policy has a 6% annual interest rate for its cash value account based on the S&P 500 index, your cash value will grow by 6% in a year when the index goes up by 6%, but it will also drop by 6% in a year when the index goes down by 6%.
• Variable life insurance: Variable life insurance offers a fixed premium, a variable rate of growth for your cash value, and a fixed death benefit amount. The rate of growth is usually the highest among all types of policies but also the riskiest and most unpredictable. You determine the rate based on your choice of investment options within the policy, such as stocks, bonds, mutual funds, etc. You can also switch between different investment options as you wish. However, you bear the full risk and responsibility for your investment decisions. For example, if your variable life policy has a 10% annual interest rate for its cash value account based on your chosen investment option, your cash value will grow by 10% in a year when your investment option goes up by 10%, but it will also plummet by 10% in a year when your investment option goes down by 10%.

As you can see, the growth potential and risks of cash value life insurance vary depending on the type of policy you choose. To illustrate how cash value can grow over time depending on the policy type, premium amount, interest rate, investment performance, etc., let’s look at some hypothetical scenarios.

Scenario 1: You buy a whole life policy with a $100,000 death benefit and a $200 monthly premium at age 35. The policy has a 4% annual interest rate for its cash value account. Assuming you pay the premiums until age 65 and die at age 66, here is how your cash value and death benefit will look like over time:

Age	Cash Value	Death Benefit
35	$0	$100,000
40	$5,040	$105,040
45	$11,920	$111,920
50	$21,120	$121,120
55	$33,120	$133,120
60	$48,960	$148,960
65	$69,120	$169,120
66	$71,840	$171,840

In this scenario, your cash value grows steadily and predictably over time at a fixed rate of 4%. Your death benefit also increases by the same amount as your cash value. If you die at age 66, your beneficiaries will receive $171,840.

Scenario 2: You buy a universal life policy with a $100,000 death benefit and a $200 monthly premium at age 35. The policy has a variable interest rate for its cash value account based on the S&P 500 index. Assuming you pay the premiums until age 65 and die at age 66, here is how your cash value and death benefit will look like over time (using historical data from Yahoo Finance):

Age	Cash Value	Death Benefit
35	$0	$100,000
40	$9,600	$109,600
45	$25,440	$125,440
50	$37,440	$137,440
55	$67,680	$167,680
60	$96,480	$196,480
65	$144,960	$244,960
66	$156,000	$256,000

In this scenario, your cash value grows faster but more unpredictably over time based on the performance of the S&P 500 index. Your death benefit also increases by the same amount as your cash value. If you die at age 66, your beneficiaries will receive $256, 000.

Scenario 3: You buy a variable life policy with a $100, 000 death benefit and a $200 monthly premium at age 35. The variable life insurance. Each type of policy has its own advantages and disadvantages in terms of premium flexibility, cash value growth potential, investment options, fees and charges, etc.

Before buying a cash value life insurance policy, it is important to understand how it works and how it grows over time. It is also important to compare and evaluate different policies and providers and choose the one that best suits your needs and goals.

If you need more information or assistance on cash value life insurance, please visit our website or contact us today. We are a team of experienced and independent life insurance agents who can help you find the best cash value life insurance policy for you. We can also provide you with a free quote and a personalized analysis of your situation. Don’t wait, get in touch with us now and secure your financial future with cash value life insurance.