If a Life Insurance Policy Develops Cash Value, Here's What You Need to Know

Having a life insurance policy with cash value can be a game-changer for your financial security. Cash value accumulates in a separate account within the policy, and it can be borrowed against or used to pay premiums.

The cash value grows over time, and you can access it to cover expenses, pay off debt, or even supplement your retirement income. You can borrow against the cash value, but be aware that interest rates may apply.

The amount of cash value your policy accumulates depends on the type of policy, its terms, and how well it's performing. A whole life policy, for instance, typically accumulates cash value more quickly than a term life policy.

Life insurance is a type of insurance policy that pays out a death benefit to your beneficiaries if you pass away. This benefit can help them cover funeral expenses, outstanding debts, and living costs.

A life insurance policy can be designed to provide a guaranteed death benefit, regardless of when you pass away. This is often the case with term life insurance policies.

The main purpose of life insurance is to provide financial protection for your loved ones in the event of your death. This can give them peace of mind and financial security.

Life insurance policies can be tailored to fit your individual needs, including your age, health, and financial situation. This ensures that you get the right coverage for your unique circumstances.

A life insurance policy can be used to pay off outstanding debts, such as a mortgage or car loan, if you pass away. This can help your beneficiaries avoid financial difficulties.

In addition to the death benefit, some life insurance policies also accumulate cash value over time. This can be a valuable resource for you to borrow against or withdraw from in times of need.

Most permanent policies build cash value, including whole, universal, variable, and indexed universal life insurance. This means that a portion of your premium payments goes toward funding the policy's cash value.

Permanent policies like whole life insurance combine a lifelong death benefit, accelerated death benefit options, and a cash value component that increases over time. The cash value of whole life insurance can grow with potential tax savings.

Term life insurance typically does not have cash value, but it can save you money upfront if planned wisely. However, permanent policies with cash value can provide more flexibility in different seasons of life.

Whole life insurance is one of the most popular choices in the life insurance market, and Aflac offers a whole life insurance plan option that requires no medical exam and is portable. This means you can take it with you wherever you go.

Aflac's whole life insurance plans can help provide for your family long-term and help you in an emergency. The cash value of a whole life insurance policy can be used to pay for premiums or other expenses, as needed.

Universal life insurance plans allow you to change the value of premium payments, giving you more adjustability in different seasons of life. The cash value of a universal life insurance policy can be used to pay for premiums or other expenses, as needed.

Variable life insurance involves more risk, as the cash value will grow or diminish depending on how the investments chosen are doing. This type of plan tends to involve more risk, but may be a great option if you have experience with investment accounts and are comfortable taking risks.

Indexed life insurance has a greater relationship with the stock market, as this is what is used to determine growth. The rate of return on the cash value within the life insurance policy is directly impacted by how the index chosen performs.

Paid-up additions can be used to increase the policy's total death benefit and cash value, with a lifetime maximum of $500,000 in added death benefit funds. The rider premium may earn dividends and can be surrendered at any point without impacting the base coverage amount.

A whole life insurance policy guarantees a fixed rate of return on the cash value, and policyholders with mutual companies may earn additional dividends. This type of policy provides stability and predictability.

With indexed universal life insurance, the cash value growth is tied to a stock or bond index, such as the S&P 500. The cash value can decrease if the indexes fall.

Variable universal life insurance offers the greatest potential returns, but it also comes with the risk that you could lose some cash value if the investments tank.

A whole life insurance policy guarantees a fixed rate of return on the cash value, and policyholders with mutual companies may earn additional dividends.

The cash value growth with whole life insurance is predictable and stable, making it a good option for those who value certainty.

Indexed universal life insurance ties the cash value growth to a stock or bond index, such as the S&P 500.

The cash value can decrease with indexed universal life insurance if the indexes fall, so it's essential to monitor market performance.

Variable universal life insurance invests the cash value in various subaccounts of stocks, bonds, or mutual funds, offering the greatest potential returns.

This kind of policy also comes with the risk that you could lose some cash value if the investments tank.

Here's a comparison of the three types of policies:

You can borrow against your life insurance policy's cash value, and the amount you can borrow is typically up to 90% of that value. This is often referred to as a policy loan.

The outstanding loan amount and any accrued interest will be subtracted from the policy's cash value or death benefit when you settle the loan. This means you'll need to pay back the loan amount with interest before the policy can be surrendered or the death benefit paid out.

You can also withdraw smaller amounts from your policy's cash value, rather than taking out a large loan. This can be a good option if you need some cash but don't want to terminate your policy.

You can access the cash value in your life insurance policy through withdrawals, policy loans, or partial or full surrenders.

These options allow you to tap into the accumulated cash within the policy, which has been built up from excess premiums plus earnings.

You can also sell your policy for cash using a life settlement.

However, be aware that accessing cash from your policy might have unwanted consequences, such as higher tax liabilities and reduced payouts to beneficiaries.

If you withdraw up to the amount of the total premiums paid into the policy, the transaction is not taxable as it is considered a return of premiums.

But if you withdraw any gains on the policy, like dividends, these amounts could be taxed as ordinary income.

If a life insurance policy develops cash value, it can be a great benefit, but it's essential to consider the pros and cons.

Policies earn money that can be withdrawn or borrowed against during your lifetime.

Cash value policies tend to have higher premiums than term life insurance, which is something to keep in mind.

Policies typically last your lifetime, providing long-term coverage.

Managing policies often requires a hands-on approach, which can be time-consuming.

Cash value loans have relatively low net interest rates, making them a more affordable option.

Here are the key pros and cons of cash value life insurance in a summary table:

This information can help you make an informed decision about whether a cash value life insurance policy is right for you.

You can cash out a life insurance policy, but be aware that the amount of money you get will depend on the cash value held in it. If you have $10,000 of accumulated cash value, you can withdraw up to all of that amount, minus any surrender fees.

This can have significant tax implications, as the cash value is considered taxable income. Withdrawals will be taxed as ordinary income, and you may be subject to penalties if you're under a certain age.

If you choose to take a policy loan, you'll be borrowing against the cash value, but this won't affect the premiums you pay or the death benefit. However, interest will accrue on the loan, and you'll need to pay it back, which can reduce the cash value over time.

You can also consider withdrawing smaller amounts or taking a loan against a portion of the cash value, often up to 90%. This can be a more flexible option, but be aware that the cash value will still be reduced over time.

If a life insurance policy develops cash value, you may be able to withdraw money from it. This can be a good option if you need some cash, but it's essential to understand the potential consequences.

You can withdraw limited amounts of cash from a life insurance policy, but the amount available differs based on the type of policy you own and the company issuing it.

The main advantage of cash-value withdrawals is they are not taxable up to your policy basis, as long as your policy is not classified as a modified endowment contract (MEC).

Cash-value withdrawals can also have unexpected or unrealized consequences such as reducing your cash value, which could cause a reduction in your death benefit. This is a potential source of funds your beneficiaries might need for income replacement, business purposes, or wealth preservation.

Some insurance companies will allow you to withdraw money from your policy's cash value savings account, but we recommend you do not take out more money than what you have paid into the account so far. Doing so may reduce the death benefit.

Here are some potential consequences of cash-value withdrawals to consider:

If you're considering surrendering your policy, you can sign a lost policy release (LPR) to surrender or cancel your policy and use the cash any way you see fit. This can be a good option if you need the cash, but it's essential to understand the potential consequences.

Surrendering the policy during the early years of ownership can result in surrender fees, reducing your cash value. These charges vary depending on how long you've had the policy and, often, on the amount being surrendered. Some policies can levy surrender charges for many years after the policy is issued.

When you surrender your policy for cash, the gain on the policy is subject to income tax. Additional taxes could be incurred if you have an outstanding loan balance against the policy.

Having a life insurance policy with cash value can be a great way to increase your coverage and financial security. The paid-up additions feature allows you to increase the policy's total death benefit and cash value.

The lifetime maximum for added death benefit funds from paid-up additions is $500,000 for all policies. This means you can't add more than $500,000 in death benefit funds over the life of the policy.

Purchased at guaranteed rates, the rider premium may earn dividends. This can increase the value of your investment over time.