Cash-value life insurance, also known as
Whole life and universal life are forms of life insurance that have a cash value component.
Whole life insurance is the best known and most common of these cash value policies. You'll pay a fixed-level premium for a whole life insurance policy, part of which pays for the insurance policy itself and part of which is invested by the insurer. The insurer then pays a fixed return.
The bad news is that term life insurance has no cash value. When your policy ends, you don't receive any money. On the bright side, it's less expensive than permanent insurance. Due to the savings on premiums, you may end up ahead financially with term coverage despite the lack of a cash value.
Whole life insurance
The cash value accumulates over this time at a minimum guaranteed rate. You can also use your company dividends (if you receive them) with your whole life insurance cash value every year to build up the account faster.
So, the face value of a $10,000 policy is $10,000. This is usually the same amount as the death benefit. Cash Value: For most whole life insurance policies, when you pay your premiums some of that money goes into an investment account. The money in this account is the cash value of that life insurance policy.
The biggest difference for policyholders between whole life and UL is the guarantees. Whole life has a guaranteed death benefit, level premiums, and growing cash value. This growth in cash value comes from annual dividends that are credited to policies. Universal life provides flexibility in lieu of guarantees.
If you outlive your term policy, your policy will end, and you will no longer have coverage. If you still want life insurance after your term policy ends, you may have the option to buy a new life insurance policy or consider a term conversion policy.
Key takeaways. Cash surrender value is the amount left over after fees when you cancel a permanent life insurance policy (or annuity). Not all types of life insurance provide cash value. Paying premiums could build the cash value and help increase your financial security.
A permanent policy's cash value grows over time and can be used to pay premiums or take out a loan from the insurer. Since permanent life insurance policies have much higher rates than term policies, and most financial obligations go away over time, term life insurance is typically the better option for most people.
The benefits of whole life insurance may sound too good to be true, but there really isn't a catch. The main disadvantage of whole life is that you'll likely pay higher premiums. Also, you're likely to earn less interest on whole life insurance than other types of investments.
Whole life insurance is generally a bad investment unless you need permanent life insurance coverage. If you want lifelong coverage, whole life insurance might be a worthwhile investment if you've already maxed out your retirement accounts and have a diversified portfolio.
Suze Orman is a big supporter of term life insurance policies, and she firmly believes that those types of policies are the best ones to have. She insists that term life insurance policies are cheaper than whole and/or universal life insurance policies and that they just make sound financial sense.
Whole life insurance, universal life insurance, and term life insurance are three main types of life insurance.
Term life is designed to cover you for a specified period (say 10, 15 or 20 years) and then end. Because the number of years it covers are limited, it generally costs less than whole life policies. But term life policies typically don't build cash value. So, you can't cash out term life insurance.
Term life insurance does not build cash value.
To calculate the cash surrender value of a life insurance policy, add up the total payments made to the insurance policy. Then, subtract the fees that will be changed by the insurance carrier for surrendering the policy.
Is life insurance taxable if you cash it in? In most cases, your beneficiary won't have to pay income taxes on the death benefit. But if you want to cash in your policy, it may be taxable. If you have a cash-value policy, withdrawing more than your basis (the money it's gained) is taxable as ordinary income.
If you want your life insurance to cover your mortgage, consider how many years you have left until you pay off your house. You don't want your policy to expire after 20 years if your mortgage payments will last another decade after that.
If you retire and don't have issues paying bills or making ends meet you likely don't need life insurance. If you retire with debt or have children or a spouse that is dependent on you, keeping life insurance is a good idea. Life insurance can also be maintained during retirement to help pay for estate taxes.
Term life insurance pays out a death benefit only if the policyholder dies during the coverage period. It's possible to pay premiums for decades and for no death benefit to be paid in the end. If no benefits are paid out, that doesn't make term life coverage a waste of money.
Avoid buying insurance that you don't need. Chances are you need life, health, auto, disability, and, perhaps, long-term care insurance. But don't buy into sales arguments that you need other more costly insurance that provides you with coverage only for a limited range of events.
Most insurance companies say a reasonable amount for life insurance is six to ten times the amount of annual salary. If you multiply by ten, if your salary is $50,000 per year, you'd opt for $500,000 in coverage. Some recommend adding an additional $100,000 in coverage per child above the 10x amount.