Interested in calculating the cash value of your life insurance? If you have permanent life insurance, a portion of the premiums you pay gradually accumulates in a savings account. Whole, variable, and universal life insurance policies are types of permanent life insurance that accumulate cash value. How can you determine the cash value of your policy?
Calculating the Cash Value of Life Insurance
You can calculate your life insurance’s cash value by adding the total of the premium payments you’ve made for the policy and subtracting fees, commissions, and expenses charged by the insurer.
The insurance company uses your premium payments in three ways:
- Death benefit (the payout to your beneficiary)
- Insurance company’s fees and profits
- Cash savings account
The distribution of your premium payments means that your permanent life insurance policy builds cash value over time. But knowing the cash value of the policy is essential. If you don’t use it, your beneficiary will receive the death benefit when you die, but the cash value will return to the insurance company.
Factors that Affect the Current Cash Value of Your Life Insurance
Multiple factors affect the current cash value of your policy.
- Total of premium payments – The sum of your premium payments depends on how long you’ve had the policy. If you’ve only had the policy a few years, your premium total won’t be significant.
- Your age when you acquired the policy – According to LIMRA research, 40 percent of life insurance policy owners wish they bought a policy at a younger age. When you’re younger, a large portion of your premium payments will go toward the cash value of your policy. As you age, it costs more for insurers to provide coverage for you, so a large portion of your premium goes toward your policy. For example, if you acquired the insurance at age 50, although you’ve had it for 20 years, most of your premiums are used to insure you, and cash accumulation will be limited.
- Rate of return on your investment – The growth of the cash value of your life insurance depends on the type of policy, the terms of your insurer, and the rate of return on the investment. Ask your insurance company for a cash value chart to see the projected appreciation rate.
- Loan balances – If you’ve already borrowed from your insurance policy, an outstanding loan decreases the cash value.
You can gather the data and try to calculate cash accumulation on your own. But it’s easier to sign up for an online account on your insurance company’s website to access the amount. Or you can contact the insurer and request the cash value of your policy.
What Can You Do with the Cash?
As mentioned, cash accumulation is a use-it-or-lose-it feature. As the funds build, some of the ways you can use them include:
- Increase the death benefit for your survivors
- Pay the premiums for the policy
- Borrow money with the understanding that an outstanding loan balance decreases the payout to your beneficiary
- Make a withdrawal, which might affect the death benefit total
- Supplement your retirement income
Is a Cash Value Policy Right for You?
If you’re exploring your life insurance options, several factors can help you determine if a cash value policy is right for you and your family.
- If you’re in a high-income bracket and maxed out of other tax-deferred accounts, a cash value policy is an option for tax-deferred savings.
- It’s unlikely that cash value will exceed the premiums paid if you surrender the policy within the first ten years.
- Permanent life insurance costs an average of six to ten times more than term life insurance. But if you choose term insurance, at the end of the term, you’ll need a new policy, or you might be able to convert to a permanent one.
- Cash value is separate from your death benefit. If you don’t use it, it’s returned to the insurance company.
At Hunt Insurance of Raleigh, NC, we’ll explain your options for permanent life insurance with cash value and how they compare with term life insurance. We will thoroughly answer your questions with easy-to-understand language that helps you make an informed decision. Start the conversation by calling us or completing our contact form.