What Happens to Cash Value in a Whole Life Policy at Death?

Whole life insurance is a form of permanent life insurance. When you pay your premium, part of the money goes to the benefit cost. The rest of the money goes into a savings account, making up your policy's cash value. This cash value grows over time, and you may access this amount during your lifetime.

But what happens to this money when you die? Here, we'll continue on to touch upon how cash value functions both when you are alive and when you've passed away.

Key Takeaways

• Whole life insurance cash value increases with time. 
• This cash value is a living insurance policy you can withdrawal once you pass away. 
• After a death, your beneficiary typically receives only the death benefit. 
• Universal life insurance coverage choices enable the beneficiary to get both the cash value as well as the death benefit.

What Is Cash Value?

Cash value of permanent insurance investments, such as whole life insurance, is intended to help you make up for the trend in insurance prices as you acquire older. You may not yet have access to the value while you are still alive.

A portion of your premium is deposited to an account that earns a rate of return over time and grows in value. With whole life insurance, these values are determined in advance and stated in the policy.

Other types of permanent life insurance, such as universal life and variable, may credit cash value appreciation of the investment element of the policy to the policy holder, which can vary depending on the current interest rate and performance of the investment.

Since cash value is often accessible after you die, it can be thought of as a kind of living advantage. However, cash value takes time to accumulate, and within the first several years of the policy, a surrender charge is often assessed if you make withdrawals from cash value. This period can last 10 years or longer, depending on the type of policy you have.

If you borrow too much or take out a loan against the cash value and cannot pay back your obligation, your policy may lapse. This denotes that you give up your insurance and unfortunately your beneficiary will not get any funds in the event of your death. Talk to your agent to understand the risks associated with withdrawals and terminations before making one.

Types of Permanent Life Insurance

Permanent life insurance lasts your whole life, but there are different types. Some will allow the cash value to be demanded upon a death, while others are set up differently.

Whole Life Insurance

Whole life is a policy where you don't pay a different premium after a long time. The premium remains level as long as you keep the policy. If you cancel or choose not to make any payments, your whole life insurance policy expires. Some whole life policies pay dividends, which can be used to increase your cash value and the death benefit.

Cash values for a whole life insurance policy are determined when the policy is issued; they are listed in the insurance policy documents.

Universal Life Insurance

Another common type of permanent insurance is universal life insurance. It has more flexibility than whole life insurance, since you can choose your premium and the death benefit. Like whole life insurance, you can go without premium payments if there is sufficient cash value; your insurance will seize monies from your cash value.

The cash values of a policy are determined when it's issue, but are subject to change in accordance with prevailing interest rates. You may require to pay greater premiums to keep the policy later on.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance in which you can invest the cash value in mutual-fund-like subaccounts. Variable policies are either universal or whole life insurance policies.

For some, the cash value in a life policy would not be possible to recoup regardless of any hedging efforts, so further payments may be required to keep a life insurance policy from expiring. If you want to purchase guaranteed life insurance, this policy is rather poor.

Indexed Life Insurance

The value of indexed universal life insurance currency is credited at a calculation based on the S&P 500. However, you get to participate in only a portion of market gains. Many of these policies are hard to understand and get. But, inflation could decrease at which you maintain insurance coverage, meaning that you may be forced to increase premiums.

What Happens to Cash Value in a Life Insurance Policy at Death?

With whole life insurance, your beneficiary normally receives the death benefit stated in the policy. Consult your policy to determine the terms and options that apply to you, especially if you build a cash value through your policy.

With indexed or variable universal life insurance, you can request bonus payments under one of the two universal life death benefit options.

Level death benefit: This is option A or choice 1. The death benefit is designed to maintain its level for the duration of the policy. With this choice, your beneficiary receives the death benefit amount alone and not also the cash payment.

Increasing death benefit: This is also called option B or option 2. In this case, the death benefit increases as the cash value goes. The death benefit is equal to the cash value plus the death benefit your policy was issued with. Your beneficiary receives all of the cash value in this case. Such policies tend to be more expensive as the cash value isn't used to offset insurance costs.

How To Access the Cash Value

While you're living, there are four primary ways to access the cash value portion of your life insurance: Depending on your capital value, you may qualify for a tax-free withdrawal. On the other hand, this option could pose tax implications if you request more money than you spent on premiums. It can also adversely affect the death benefit for your beneficiaries.

Request a withdrawal: Pertaining to the value of your asset, you can initiate a tax-free withdrawal. However, this regard may have tax ramifications if you request a sum that is higher than what you owe in premiums. It also can reduce death benefits for your beneficiaries.

Take out a loan: If you cannot take out a loan from the cash value, you can build up the money for a future loan by requesting one from me. I'll deduct this loan, along with interest, from your inheritance when you die.

Surrender the policy: You can receive the cash surrender value if you surrender your whole life policy. This option gives access to a cash value minus the cost. However, cutting off the death benefit means that if you die, your beneficiary will not receive any payment.

Apply the cash value to premiums: Universal life insurance and whole life policies let you use your cash value to cover premiums, which is often useful while money is tight. But, be sure to not deplete the cash value too much. Otherwise, your policy may lapse.

Frequently Asked Questions

Is whole life insurance worth it?

Whole life insurance is more expensive than other kinds of insurance, mainly because you can withdraw part of your cash value in the form of an income stream. Speak to a financial adviser at the earliest opportunity to find out more.

Can you cash out a whole life policy?

You have the option to surrender your whole life policy for the value of its surrender value, thereby allowing yourself to access the cash value (minus any fees). However, this cancels the death benefit so that if you die, your beneficiary will not receive a payment.