Cash Value of Whole Life Policy
Whole life insurance coverage can provide a financial safety net for loved ones in the event of an untimely death. This type of coverage ensures a set payout amount as long as the policy remains active, and it builds cash value along the way. The cash value feature provides policyholders more options in terms of purchasing additional insurance or borrowing money against the policy.
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Whole Life Insurance
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Whole life makes up one of two categories of life insurance; term life is the other. One primary difference between the two lies in the cash value feature provided by whole life polices, according to the Senior Journal. Insurance coverage comes in the form of a death benefit payable upon time of death. Term and whole life both offer a death benefit. With whole life coverage, a savings account builds as premiums are paid into the policy. And while whole life plans are more expensive, the cash value feature provides certain benefits that term life coverage doesn’t.
Function
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Premium payments made toward a whole life policy remain at a fixed rate for the life of the policy. Premium payments made during the early years of a policy more than cover the current cost of insurance, according to the New York State Insurance Department.
Some of the excess premium amount is used to compensate for the increased cost of insuring an older policyholder during the latter years of the policy. The remainder of the excess premium amount goes toward the cash value of the policy and administrative costs. Insurance companies can invest accumulated cash values and earn interest on them.
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Cash Value
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The distinction made between the cash value in a whole policy and the death benefit, or face value, enables policyholders to use a policy’s cash value much like a savings account. According to the New York State Insurance Department, policyholders can withdraw money from the cash value portion of a policy without affecting its face value, provided there’s cash available to borrow. Cash amounts can also be put toward the purchase of a single premium payment policy that provides an additional death benefit amount.
Face Value
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A policy’s face value amount remains the same through for as long as the policy remains active, according to the New York State Insurance Department. When first starting out, the cash value remains significantly lower than the face value, unless premiums are paid well above the minimum required amounts. Over time, accumulated premium payments bring the cash value closer to the face amount. If a person decides to surrender a whole life policy, he can receive whatever cash has accumulated minus the administrative costs.
An example of this process might involve a policy with a $100,000 face value that requires a $100 monthly premium payment. After five, 10 and 20 years, premium payment totals would amount to $6,000, $12,000, and $24,000 respectively. With a 3 percent interest rate applied to each payment, cash value accumulations would amount to $180, $360 and $720, while the face value would remain unchanged.
Single Premium Policy
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Because of the savings feature built-in to whole life policies, single premium payment plans can be applied toward retirement or estate planning needs, according to the New York State Insurance Department. These policies are considered paid in full upon receipt of the one premium payment, which can be substantial. In effect, these policies generate immediate cash value that can accrue interest over the years. As with whole life policies, policyholders can also borrow against whatever cash value exists within a single premium policy.
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