One of the most important features of permanent life insurance, which is not found in most term life insurance policies, is the Cash Value.
When your premium payments are more than the cost of the insurance, the excess goes into a cash value account, which incidentally will also draws interest. It is very much like the saving account portion of your life insurance policy.
The actual cash value amount depends on many factors, including:
– The policy’s face amount.
– How long you’ve owned the policy.
– Length of the premium payment period.
– Whether you have any outstanding policy loans.
If your life insurance is a permanent life insurance, your policy should have a table of cash values. If it doesn’t I suggest you contact your agent immediately and ask about it.
Having cash value also offers you some other options:
– You can cancel the policy and receive the cash value as a lump sum: the Surrender Cash Value.
– If you need to stop paying premiums, you can use the cash value to continue your current policy for a specific period of time.
– You can withdraw part of the cash value in the form of a policy loan.
A few words about the Surrender Cash Value.
Canceling a life insurance policy is called surrendering it. Surrendering the entire value, with termination of all insurance benefits, it is often called “cashing out.”
Surrender cash value is the amount of cash that is due to the policy owner who surrenders a life insurance policy. It is a refund.
Surrender charges may be deducted if your life insurance policy or annuity is cashed out. The amount of the surrender charges vary widely among insurance companies and may change over the life of the policy.
Another advantage of having cash value has to do with Life Insurance Policy Loans.
Once a policy builds cash value you can use it to apply for a policy loan. The loan can be for any amount up to the policy’s cash value.
A policy loan has some advantages over a commercial loan: the loan is easier to get and there is no schedule for repayment. The insurance company will not check your credit; it will grant the loan based only on your policy’s cash value. You can repay a policy loan at any time, in part or in full.
Of course, if you die before the loan is repaid, the amount of the unpaid loan, plus interest, is subtracted from the death benefit.
As you can see Cash Value is an important aspect bearing significant weight on the deciding what type of life insurance you may want to buy.
In conclusion a little warning note; some life insurance policy holders have fallen victim to a practice called twisting or churning.
Churning often happens when people with cash value policies are persuaded to convert their coverage to a different policy, often one with a promise of better benefits. The problem is that the cash value of the original policy is raided in order to pay for the new policy.
Consumers unaware of this practice, which actually should be called malpractice, may not realize until years later that the higher benefit policy is actually worth only a fraction of the value of the original policy.
Mark Van Neem
