Calculating Term Life Insurance Cash Value: A Simple Guide

Term life insurance is a temporary contract between you and a life insurance company. Unlike permanent life insurance, it has an expiration date. While term life insurance can be a useful and more affordable policy for many people, it doesn't build cash value. However, if you're looking for a type of life insurance that may have cash value, there are several options to consider. This includes whole life insurance, universal life insurance, and variable universal life insurance, all of which have their own unique features and benefits.

When it comes to calculating the cash value of a life insurance policy, there isn't a simple answer due to the varying ways cash value is accumulated for different types of policies. The sum of premiums paid, the duration the policy has been in effect, and the value of your death benefit often define the cash surrender value. Consulting your insurance company is the best way to determine the cash value of your specific policy.

Whole life insurance

The cash value of a whole life insurance policy is a savings component that grows over time. As you pay your premiums, a portion of the payments goes into the cash value account, which earns interest. This cash value can be accessed by the policyholder during their lifetime and used for various purposes, such as paying policy premiums, taking out loans, or supplementing retirement income. The cash value serves as a living benefit and can provide financial security for the policyholder and their loved ones.

The cash value in a whole life insurance policy typically grows at a fixed rate determined by the policy's terms. This accumulation may start slowly and gradually increase over time. The growth rate can be influenced by factors such as premiums paid, dividends received, and interest earnings. Policyholders can choose to reinvest dividends back into the policy, further accelerating the growth of the cash value.

It's important to note that the cash value of a whole life insurance policy can decrease due to withdrawals, policy loans, or charges related to the policy's maintenance. Additionally, the funds allocated to the cash value decrease as the policyholder ages, while the money paid towards insurance increases. Therefore, it's crucial to carefully consider your financial goals and priorities when deciding between whole life insurance and other types of life insurance, such as term life insurance.

To calculate the cost of a whole life insurance policy, it is advisable to work with a licensed life insurance agent. However, online calculators can provide estimates based on factors such as age, gender, coverage amount, and health status. These calculators can help compare different insurance options and make an informed decision about the most suitable coverage for your needs.

Universal life insurance

Any premiums paid over the COI amount add to the policy’s cash value, subject to an upper limit set by the IRS. Different policies calculate cash growth in different ways. The cash value earns an interest rate set by the insurer, and it can change frequently, although there is usually a minimum rate that the policy can earn.

The cash value of a universal life insurance policy can be used in several ways. Policyholders can borrow against the accumulated cash value without tax implications. The interest rates on these loans are often lower than rates available for a personal loan, and they don’t require a credit check. However, unpaid loans will reduce the death benefit by the outstanding amount. Policyholders can also make partial withdrawals from the cash value, but these may be taxed. Additionally, the cash value can be used to pay policy premiums.

Variable universal life insurance

• Variable Universal Life Accumulator II: This option provides long-term protection with flexibility in the timing and amount of premiums paid. It also offers the potential to grow assets with various tax advantages and an expedited underwriting process.
• Market Wealth Plus: This policy provides a wide array of investment options and the potential for earlier accumulation and access to cash value.

Indexed universal life insurance

An indexed universal life insurance policy allows for cash value growth through an equity index account. The policyholder can decide how much cash value to assign to an equity-indexed account and to a fixed-rate account. The cash value in the account grows based on the performance of the underlying index it is tracking. The total cash value is credited with interest based on increases in an equity index. If the index increases during the month, interest is added to the cash value. The index gains are credited back to the policy, either on a monthly or an annual basis.

The cash value of an indexed universal life insurance policy can be used to lower or potentially cover premiums without subtracting from the death benefit. The accumulated cash value can also be used to take out a loan at a lower rate than banks offer.

Permanent life insurance

The cash value of permanent life insurance is calculated based on the premiums paid, the length of time the policy has been in force, and the size of the death benefit. One portion of the premium goes toward the death benefit, another goes toward the insurer's costs and profits, and the third contributes to the policy's cash value.

The cash value of permanent life insurance typically starts to accumulate after a few years of premium payments. It grows tax-deferred at a rate determined by the policy terms, which can be a fixed rate or dependent on investment performance. The cash value can be accessed in several ways, including withdrawals, loans, or surrendering the policy.

When deciding whether permanent life insurance is right for you, consider your financial situation and goals. It offers lifelong coverage and flexible access to funds but typically comes with higher premiums than term life insurance.

Frequently asked questions