Since the sale of life insurance began in the US in the late 1760s, it was purchased generally for its “Death Benefits.” In other words, its purpose was to provide survivor benefits for those who were left behind in the event of one’s death. While this is an important consideration for any family’s financial security, it may not be at the forefront of your mind. In fact, when I first considered obtaining life insurance, and began thinking about term life insurance and its death benefits, a little voice in the back of my head kept saying, “But what if I live…?” I still purchased the term insurance because I didn’t want to risk leaving my wife and children hurting financially but, as time went on, I learned that whole life insurance offers living benefits I hadn’t even considered, benefits I couldn’t reap with my term life insurance policy.
Cash Value is the liquid portion of a whole life policy’s death benefits. It grows at different rates for different insurers, building up in the policy and creating these living benefits. The more cash build up you have, the more living benefits you’ll enjoy. But just what are those living benefits? What is cash value really and what can you do with it?
When you enter into a contract with a mutual insurance company through the purchase of a whole life insurance policy you essentially become an owner of that company. As you deposit money into your policy, you not only have a guarantee that you will never lose principle, but you are also guaranteed a growth component on your cash value. Many insurers also pay an annual dividend to policy holders, allowing you to benefit from a company’s excess profits.
The benefits don’t end there. If you examine a whole life contact, you will learn that your cash value provides you access to loans with tax advantages. The policy has a contractual guarantee, which allows you to loan against your cash value, tax free. This means that as your cash value accumulates, you are also able to use the insurance company’s money to make purchases or investments. The lifetime, tax-free benefit means the loan will continue to be untaxed, even if it is not repaid, until your death. Though is it not required, it is advisable to pay back your loans so that the interest on borrowed cash value does not continue to accrue, diminishing your death benefit.
Cash value allows you to leverage your policy as you make ongoing contributions, increasing personal financial growth by leveraging guaranteed policy growth, company dividends, and the tax advantages of borrowing against cash value.
Nate Butler
