Cash Value And Whole Life Insurance


    Cash value of a whole life insurance policy is the contractual dollar amount the insurance company will exchange with a policy owner in the event the insurance policy is cancelled. This same cash value is the basis by which the insurance company will loan to the policy owner. The loan is collateralized by the cash value. The insurance company will not lend the policy owner more than the total cash value.

    Cash value is also accessible by the policy owner through a partial surrender which is a physical withdrawal of the cash value.It is important to understand what cash value is, how it grows and how it can be utilized.

  • Cash Value Growth

    Whole life insurance is a unilateral contract between the insurance company and the policy owner. In this contract, there are guarantees and benefits to the policy holder(s), one of which is guaranteed cash value growth. Cash value grows tax-free. When the cash value is withdrawn for income or otherwise, it is also tax free until the withdrawals exceed the basis of the policy. The basis is the amount of premiums that have been paid over time by the policy owner. At this point the withdrawals are taxed at ordinary income tax rates.

    Cash value also grows if the policy owner elects to have his dividends buy paid up additions. Dividends are declared every year by the Mutual Insurance Company. In the subsequent year they are divided amongst policy owners on the anniversary date of their policy. The anniversary date is the month and day the policy was originated. Although dividends are not guaranteed mutual insurance companies have a long track record of paying dividends. Some companies have paid for over 100 years.

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  • Loans against Cash Value

    Through the policy loan provision, a policy holder can access the value of his cash value without incurring taxes. This is because policy loans are treated as debt, which is not a taxable distribution. A similar financial transaction is a Real Estate cash out refinance. No taxes are paid on the refinance proceeds. Although policy loans are not required to be paid back, it is recommended. The Insurance company charges interest on the outstanding policy loan but do not require payments to be made. However, an outstanding policy loan will reduce the overall available cash value and if death were to occur with an outstanding policy loan, the loan would be paid back via the death benefit proceeds.

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