The cash value of your life insurance policy will be low if the policy is new. Only a portion of each premium goes toward the cash value, so if you haven’t made many payments, the cash value hasn’t had time to grow.
Every time you make a premium payment on a permanent life insurance policy, part of that amount goes into a cash value account. The cash value is a tax-advantaged savings component that can be accessed during your lifetime, if you need it, through withdrawals or borrowing against it. Read on to learn more.
All life insurance policies provide a death benefit payout to your beneficiaries after you pass away. Some types of life insurance, like whole life, also have an accumulation component, called the cash value. The cash value can build over time, and some of that growth can be guaranteed. With some policies, you can even invest the cash value in securities similar to mutual funds. Cash value growth allows for a couple of key benefits:
The cash value of life insurance allows you to access some of your policy’s value while you are still alive. That gives policy owners additional financial flexibility. Your family can still rely on the death benefit after you’re gone, but you will have access to funds while you’re alive, should you need them. These funds can be used however you like. However, accessing the cash value will reduce the available cash surrender value and the death benefit of the policy. Common ways to use the cash value of a life insurance policy include:
The funds within your cash value account grow tax-deferred. Often, this growth is at a rate of interest that is set when you purchase the policy. Some policies allow you to invest the cash value in securities, so the cash value has the opportunity to grow based on market performance. If you need to withdraw these funds, you can usually do so tax-free. However, your death benefit will decrease when you access money from the policy.
Learn more about the options and benefits of whole life insurance with cash value.
Cash value accounts provide an additional aspect of flexibility. But because of that, they are slightly more complex. Here’s what you need to know about the process of purchasing a life insurance policy with a cash value component:
When you purchase your policy, you can modify your benefits with options called “riders,” which can provide additional coverage or ways in which you can use the policy. If your policy has an investment option, like with a variable universal life policy, make sure the investments you choose align with your financial goals and risk tolerance.
Usually, it takes many years to build up cash value, but there are certain types of policies that can accumulate it at faster rates. Over time, the cash value can become a substantial financial cushion that can be accessed if you need it.
Cash value is a financial asset, and you can tap into it for any reason when you need it. It could be used to pay off a mortgage, help with medical bills, supplement retirement income, or finance a child’s education.1 Here are the common ways you can access the cash value of your life insurance policy:
Withdrawals: Policies other than Whole Life may offer less flexibility in accessing the cash value, or in those cases accessing the cash value may have a more serious effect on the life insurance benefit.
Borrow against: The insurer can offer you a loan against your cash value, generally at a better interest rate than you would get for a similar loan from another source (like a home equity loan). This is a tax-advantaged way to access your cash value.2
When you pass away, the life insurance benefit is paid to your beneficiaries. This amount is usually income tax-free. It can help members of your family get through a difficult time and maintain their lifestyle while they deal with their loss. The final benefit amount can change depending on whether or not you have accessed the cash value.
Whole Life has a cash value component which is a significant feature of the policy. Universal Life also involves cash value accumulation, but it is often less significant. Term life policies do not accumulate cash value. You can also choose whether the cash value grows at a defined steady rate (like a CD) or is invested in securities (like mutual funds) and grows with the market.
Which you should prioritize will depend on your goals. The benefit payout is often important for your family. It may be needed to maintain your family’s lifestyle and cover debts after you pass away. Many experts consider roughly 10 years of your salary to be a good baseline for a death benefit, but the optimal amount will vary based on your individual situation. If you feel comfortable with how much you’re otherwise able to leave your family, you can focus on cash value. A protection-first retirement strategy combines both options, and a financial professional can help you find the right balance.
The cash value of your life insurance policy will be low if the policy is new. Only a portion of each premium goes toward the cash value, so if you haven’t made many payments, the cash value hasn’t had time to grow.
If you take out a loan against your cash value, as with any loan, you will repay it with interest. But the interest rates are usually more favorable than you would get for loans from other sources. Any amount that has not been repaid when you pass away will reduce your life insurance benefit payout.2
That will depend on the type of policy you have and the amount you receive from surrendering the policy. Before surrendering your policy, you should consult your financial professional and a tax professional to make sure you get the most that you can.
In general, it takes many years for the cash value to accumulate to significant amounts. However, different cash value life insurance policies can grow at different rates. Some are designed to grow faster or to allow you to invest in securities.
A New York Life financial professional can help you go over your options.
1Accessing the cash value will reduce the available cash surrender value and the death benefit. Policy loans involve interest payments.
2The total outstanding loan balance (which includes accrued loan interest) reduces your policy’s available cash surrender value and life insurance benefit. The amount you borrow will accrue interest daily. Any loan interest that you do not pay when due will be added to the policy's outstanding loan principal and will also accrue interest daily.
If your policy lapses, or if you surrender it while you have an outstanding policy loan, you may be liable for federal or state income taxes if the value of the outstanding loan plus your cash surrender value is more than the total amount of premiums you have paid into your policy (less certain non-taxable distributions). New York Life will report any taxable gain to you, the Internal Revenue Service (IRS), and any applicable state taxing authorities. Please be sure to discuss this with your tax advisor.