People buy life insurance for all sorts of reasons. Everybody has someone or something they want to protect in the long run. Many people choose life insurance to leave their loved ones in secure way or to keep their business going smoothly even after they are gone. Nowadays, life insurance policy makes a big part of serious financial planning, especially in cases when people haven’t been putting money aside over the years. With life insurance policy, you can even help someone out when it comes to education or medical bills, as many permanent policies build a cash value over the time. Hence, you should know the right cash surrender value of life insurance before you choose a policy.
What is Cash Surrender Value of Life Insurance?
The cash surrender value or cash value is the sum of money that was built over time by the police holder, that insurance company pays out in the event when policy is voluntarily terminated before or in case insured event occurs. This cash value is money saved over time, the savings component of most permanent life insurance policies (such as whole life insurance policy). It is also known as policyholder’s equity.
How Cash Surrender Value of Life Insurance Works?
Cash surrender value is a savings element of life insurance policy that could be payable before the end of the policy, or in case of death. However, we are talking about small amount of money in the beginning of the payment. The cash value is built little by little over time. During the early years of a whole life insurance policy, the savings portion brings very little return compared to the later years of the policy.
Cash value is build up inside a permanent life insurance policy over the years. However, if we decide to use this cash value after some years, value will be less than the actual cash value. This happens because in first few years, insurer may deduct expenses upon cash surrender.
Depending on the type of policy, the cash value could be used before something happens, in case of emergency. However, keep in mind that borrowing this money will reduce the amount of the death benefit for the same amount.
How to Access the Cash Value of Life Insurance?
It is very important to make a good research before you choose life insurance policy. Make sure you know what should be covered, as policy that covers less or more than you actually need, or doesn’t offer the options that would be great in your situation, can only do harm to your finances. That wouldn’t be a good financial plan for the future.
When it comes to cash surrender value of life insurance, in most whole life insurance plans the cash value is guaranteed only in cases when the policy is cancelled. However, you always have a chance of borrowing the money of the cash value for current use. In that case, policyholder will pay a low rate of interest on the loan, which could result in a reduced death benefit if not repaid. What makes this life insurance plans more desirable is that these kinds of loans on cash value are tax-free. However, some of life insurance plans don’t guarantee a cash value.
Whatever the case might be, borrowed cash value can be as big, as long as sufficient cash value remains inside the policy. This is the only way to support the death benefit. With whole life plans, loans are not considered cash surrenders, so the level of cash value is not affected. Depending of the policy you choose, if cash value growth falls below the minimum level needed to sustain the death benefit, the policyholder is required to put enough money back into the policy to prevent it from lapsing.