How Whole Life Insurance Cash Value Works

How whole life insurance cash value works is the question behind most whole life decisions. Cash value is the reserve that builds inside the policy, and you can use it while you are alive.

This guide explains how it grows, how to access it and what to watch out for.

Part of our complete guide: Whole Life Insurance: The Complete Guide.

How whole life insurance cash value works?

Part of each premium goes into the policy's cash value. It grows on a schedule written into the contract, and the growth is tax-deferred under current rules. In the early years it grows slowly, because more of the premium goes toward the cost of coverage and policy expenses.

• Borrow against it. Policy loans let you access cash value. Unpaid loans and interest reduce the death benefit.
• Surrender it. If you cancel, you receive the cash value minus any surrender charges. Gains may be taxable.
• Use it to pay premiums. Some policies can use cash value or dividends to help pay premiums.

Cash value is a feature, not the main reason to buy. Whole life works best when you also want the lifelong coverage.

How whole life policy loans work

Policy loans are one of the main uses of whole life cash value. They can help with an emergency or a big expense without a bank application.

Treat them carefully. Watch the loan balance, pay the interest if you can, and ask for an in-force illustration if you borrow a large amount.

What are whole life dividends?

Some whole life policies from mutual insurance companies are participating. They may pay annual dividends when the company's results allow. Dividends are not assured, but many insurers have paid them for long periods.

• Take them as cash.
• Use them to reduce premiums.
• Buy paid-up additions, small amounts of extra coverage that also build cash value.
• Leave them on deposit to earn interest.

What sets your whole life premium

• Age at purchase. Premiums are level for life, so buying younger sets a lower lifetime rate.
• Health. Your rate class depends on underwriting.
• Tobacco use. Raises the premium.
• Coverage amount. Whole life costs more per dollar of coverage than term.
• Premium schedule. Paying over a shorter period, like 20 years, means higher payments for fewer years.
• Participating or not. Participating designs can cost more up front.

How life insurance is taxed

In most cases, your beneficiaries receive the death benefit generally income-tax-free. They file a claim, the insurer pays, and the money is theirs to use for the mortgage, bills or anything else.

• Interest can be taxable. If the benefit is paid in installments, the interest portion may be taxed.
• Estate tax is separate. A policy you own can count toward your estate. Most families never reach the federal estate tax limit, but large estates should plan ahead.
• Ownership matters. Who owns the policy, who is insured and who is the beneficiary can change the tax result. Three different people in those roles deserves a closer look.

This is general information, not tax advice. A tax professional can look at your exact situation.

Why work with an independent agency

We are an independent agency, which means we are not tied to one insurer. We compare plans from several carriers and help you pick the one that fits.

• More choices. Several carriers, not one.
• Help with health history. Some carriers view certain conditions more favorably than others.
• No added cost. Premiums are set by the carrier, not the agent.
• No pressure. If a policy is not a fit, we will say so.

Riders worth knowing about

A rider is an option you add to a policy. Some are built in at no extra cost, others add to the premium. Availability and terms vary by carrier and state, so check the details of any policy you consider.

• Accelerated death benefit. Lets you access part of the benefit early if you are diagnosed with a terminal illness, and on some policies a chronic or critical illness.
• Waiver of premium. Keeps the policy in force without payments if you become totally disabled, as defined in the policy.
• Return of premium. Refunds premiums you paid if you outlive the term and the policy stays in force. It costs more.
• Child rider. Adds a small amount of coverage for your children under your policy.

Riders are useful, but each one adds cost or complexity. Pick the ones that fit a real worry, and skip the rest.

Whole life or term?

Many people use both: term for large temporary needs and a smaller whole life policy for lasting goals.

Who whole life insurance is for