Cash Value and Loans

The cash value of a life insurance policy represents the investment component of a cash value policy (such as a whole life policy). The policy will state whether it has, or will have, any cash value. (If it will not, the policy is a term insurance policy.) The cash value should increase each year as you make premium payments, part of which are invested and earn income over time.

Upon the death of the policyholder, most cash value insurance policies provide that the amount of the cash value becomes a part of the total death benefit, rather than being an addition to it. Thus, if at the death of policyholder, a $100,000 policy has a cash value of $25,000, the policy beneficiary will receive $100,000, not $125,000.

Insurance loans. Cash-value life insurance policies allow the policyholder to borrow up to a specified percent of the cash value, frequently 95 percent, at fixed or variable rates. These loan rates are often less than those charged by commercial lenders, and can be received without the usual credit checks associated with commercial loans, since the policy itself provides the security for the loan.

Paid-up insurance. Cash-value life insurance policies will also have a table showing the amount of paid-up permanent insurance that the policyholder can obtain on surrendering the policy, instead of getting cash or extended term coverage.

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