How do I know the cash value of my whole life insurance policy?
Consult your insurance agent for assistance in determining the precise face amount. Your agent can also help you understand the pros and cons of various options if you need to withdraw cash from your permanent life policy.
The calculation depends on the type of policy. For whole life policies, the guaranteed cash value will equal the face amount at age 100; this is called policy endowment. The guaranteed cash value is discounted using specific interest rates and assumptions to arrive at the cash value in any given year.
Most whole life insurance policies mature at 121 years, although some mature at 100 years. Say, for example, that you purchase an insurance policy with a face value of $10,000. Once the policy matures, the cash value of the policy should equal $10,000.
A whole life insurance policy will begin building cash value as soon as you pay your first premium, and it will continue building throughout the life of the policy as long as there are funds in the account.
Your life insurance's cash value is based on how much you've paid in premiums, how long your policy's been active, and the size of your death benefit.
Generally, the cash surrender value equals the cash value balance minus any surrender fees on the policy. For example, your life insurance policy has a balance of $30,000. The surrender fees on the policy are $5,000. The total cash value amount is $30,000, but if you surrender the policy, you receive $25,000.
If you have a permanent life insurance policy that has accumulated cash value, then yes, you can take cash out before your death.
Though they are tax-advantaged, policy loans and withdrawals do have one major downside: The more you take out, the less your beneficiaries will receive. It's also worth noting that cash value will not build up quickly. It may take 10 years or longer before your policy is worth enough for you to reap the benefits.
However, most people receive around 20% of the face value on average, according to LISA. So, if we're using that 20% average to calculate the cash value of a $100,000 life insurance policy, the cash value of the policy would be $20,000.
In the early years of the policy, a higher percentage of your premium goes toward the cash value. Over time, the amount allotted to cash value decreases. Each year as you grow older, the cost of insuring your life gets more expensive for the life insurance company.
When can I borrow against my whole life insurance?
It is also important to note that in order to borrow from your life insurance plan you will first need to accrue cash-value by paying into your policies. You can expect to pay into your policy for at least two years before being able to borrow any material amount of money against your permanent life insurance policy.
One option is to purchase paid-up additions (PUAs). A PUA is guaranteed permanent, paid-up life insurance. This can provide you with a growing cash value and a death benefit that is guaranteed once purchased.
For people with long-term financial goals that include providing a death benefit for their beneficiaries, whole life insurance is worth considering. While premiums may be higher than term life insurance, the lifelong coverage provides the necessary coverage along with the potential for cash value growth.
You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.
How Is Actual Cash Value Calculated? In the insurance industry, actual cash value gets calculated by taking the replacement cost value of property and subtracting the depreciation from it.
Whole Life Insurance Cash Value
A cash value life insurance policy is similar to a retirement savings account in that it allows investments to accumulate tax-deferred interest. Part of each premium payment goes toward the policy's cash value, which can be withdrawn or borrowed against later in life.
Fortunately, it's easy to calculate your cash surrender value. First, add up the total payments you've made toward your life insurance policy. Then, subtract the surrender fees your insurance company will charge. You'll be left with the actual payout you may receive if you terminate or surrender your life insurance.
A typical life settlement is worth around 20% of your policy value, but can range from 10-25%. So for a 100,000 dollar policy, you would be looking at anywhere from 10,000 to 25,000 dollars.
- Nationwide : Best for whole life insurance.
- New York Life: Best for cash value policies.
- State Farm : Best for customer satisfaction.
- MassMutual: Best for permanent life insurance.
- Penn Mutual: Best for custom coverage.
- Northwestern Mutual: Best for a personalized experience.
If you decide to cancel whole life insurance or another permanent life product, you could receive a payout based on the cash surrender value. Surrender charges: Be mindful that surrendering your policy, particularly in the early years, often incurs surrender charges. These fees will reduce the amount you receive.
What happens if you outlive your whole life insurance policy?
Most whole life policies endow at age 100. When a policyholder outlives the policy, the insurance company may pay the full cash value to the policyholder (which in this case equals the coverage amount) and close the policy. Others grant an extension to the policyholder who continues paying premiums until they pass.
The policy becomes paid-up when the policy owner chooses to trigger the reduced paid-up feature of their whole life policy before reaching the end of the premium paying period. They can choose the paid-up status with a lower death benefit.
Con: Higher premiums
Due to the lifelong coverage and cash value component, whole life insurance comes with higher premiums.
Cashing out your entire whole or universal life insurance policy should always be the last option. In fact, many financial advisors recommend waiting 10 to 15 years for the policy to build cash value before considering cashing it.
Is Cash Value Life Insurance Taxable? Cash value life insurance is generally not taxable as it grows within the policy. However, taxes may apply to withdrawals, loans, or surrenders that exceed the total premium payments made, so it's essential to understand the specific rules and consult a tax advisor for guidance.
