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What is the Cash Value of a life Insurance Policy?

One important feature of permanent life insurance, which is not found in most term life insurance policies, is a "cash value."

When your premium payments are more than the cost of insurance, the excess goes into a cash value account and draws interest. It is the "savings" portion of a life policy.

The actual 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.
Your policy should have a table of cash values. If it doesn't, contact your agent.

Having cash value offers you some options:
  1. You can cancel the policy and receive the cash value as a lump sum: the surrender cash value.
  2. If you need to stop paying premiums, you can use it to continue your current policy for a specific time.
  3. You can withdraw part of the cash value in the form of a policy loan.

Surrender Cash Value

Cancelling a life insurance policy is called surrendering it. Surrendering the entire value, with termination of all insurance benefits, 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.

Life Insurance Policy Loans

Once a policy builds cash value you can use it to get 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.

Tip: Some life insurance policyholders have fallen victim to a practice called "twisting" or "churning." Churning occurs when your coverage is changed only to benefit the seller while you suffer a loss in the process. Churning often happens when people with cash-value policies are persuaded to convert their coverage to another 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. Luckless consumers may not realize until years later that the "higher" benefit policy is actually worth only a fraction of the value of the original policy.


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