Home / Start Ups / Investors / How Cash Value Builds in a Life Insurance Policy

How Cash Value Builds in a Life Insurance Policy

Cash-value life insurance, also known as permanent life insurance, includes a death benefit in addition to cash value accumulation. While variable life, whole life and universal life insurance all have built-in cash value, term life does not.

Once you have accumulated a sizeable cash value, you can use these funds to:

  • Pay your policy premium
  • Take out a loan at a lower rate than banks offer
  • Create an investment portfolio that maintains and accumulates wealth
  • Supplement retirement income

So, how exactly does cash value accumulate in your permanent life insurance policy? The details vary depending on the type of policy you have and each individual life insurance company. However, this is typically how the process works:


Premium Payments are Divvied Up

When you make premium payments on a cash-value life insurance policy, one portion of the payment is allotted to the policy’s death benefit (based on your age, health and other underwriting factors). The second portion covers the insurance company’s operating costs and profits. The rest of the premium payment will go toward your policy’s cash value. The life insurance company generally invests this money in a conservative-yield investment. As you continue to pay premiums on the policy and earn more interest, the cash value grows over the years. 


Accumulation Slows Over Time

When you have cash-value life insurance, you generally pay a level premium. In the early years of the policy, a higher percentage of your premium goes toward the cash value. Over time, the amount allotted to cash value decreases. It’s similar to how a home mortgage works: In the early years, you pay mostly interest while in the later years most of your mortgage payment goes toward principal.

Each year as you grow older, the cost of insuring your life gets more expensive for the life insurance company. This is why the older you are, the more it costs to purchase a term life policy. When it comes to cash-value insurance, the insurance company factors in these increasing costs.

In the early years of your policy, a larger portion of your premium is invested and allocated to the cash value account. Generally, this cash value can grow quickly in the early years of the policy. Then in later years, the cash value accumulation slows as you grow older and more of the premium is applied to the cost of insurance.


Different Policies Accumulate Cash Value in Different Ways

  • Whole life policies provide “guaranteed” cash value accounts that grow according to a formula the insurance company determines.
  • Universal life policies accumulate cash value based on current interest rates.
  • Variable life policies invest funds in subaccounts, which operate like mutual funds. The cash value grows or falls based on how well these subaccounts perform.


Step-By-Step: How Cash Value Grows


The Bottom Line

Source link

About Amy Harvey

Amy R. Harvey writes forStartUps Sections In AmericaRichest.

Check Also

Stocks Mixed As Earnings Ramp Up; Oil Extends Gain: Markets Wrap

European stocks slipped, U.S. equity index futures were range bound and Asian shares were mixed …

Leave a Reply

Your email address will not be published. Required fields are marked *