Finding Cash Value In Life Insurance: A Step-By-Step Guide

Life insurance is a valuable financial tool that provides peace of mind and security for individuals and their loved ones. While the primary purpose of life insurance is to offer a death benefit to beneficiaries, some policies also offer a living benefit in the form of cash value. This feature allows policyholders to access and utilise their policy's cash value while they are still alive, providing financial flexibility during their lifetime.

The cash value of a life insurance policy is a savings or investment component that accumulates over time. It is typically found in permanent life insurance policies, such as whole life, universal life, and variable universal life insurance. This cash value can be accessed in several ways and used for various financial goals, such as supplementing retirement income, funding a child's education, or even covering emergency expenses.

However, it is important to carefully consider the implications of accessing the cash value, as it may reduce the death benefit and affect the growth of the policy. Additionally, there may be tax consequences and fees associated with withdrawals.

To determine the cash value of a life insurance policy, individuals should contact their insurance provider, log into their member portal, or refer to their insurance statement. This value is influenced by factors such as the amount of premiums paid, the length of time the policy has been active, and the size of the death benefit.

Understanding the cash value of life insurance and its accessibility is crucial for policyholders to make informed decisions about their financial future and maximise the benefits of their policy.

Contact your insurance provider

Contacting your insurance provider is the easiest way to determine the cash value of your life insurance policy. They will be able to tell you immediately what the value of your policy is.

Your insurance provider will be able to give you a clear picture of your policy's cash value, as well as any fees or surrender charges that may apply. They can also outline the different options available to you for accessing this cash value, such as loans, withdrawals, or cashing out the policy.

It is important to remember that the cash value of your life insurance policy is separate from the death benefit. The death benefit is the amount paid out to your beneficiary upon your death, while the cash value is a living benefit that you can access while you are alive. The cash value of your policy can be used to pay premiums, take out a loan, or be withdrawn as cash.

By contacting your insurance provider, you can also learn about the different types of life insurance policies and how they may impact the cash value. For example, term life insurance does not have a cash value feature, while whole life insurance and universal life insurance do. Understanding the specifics of your policy will help you make informed decisions about accessing your cash value.

Your insurance provider will also be able to advise you on any tax implications of accessing your cash value. While the cash value may not be taxed while it accrues, withdrawals or surrenders may be taxed in certain circumstances. Consulting with your insurance provider and a tax professional can help you navigate these complexities and make the most informed choices.

Calculate total payments and subtract surrender fees

To calculate the total payments and subtract surrender fees, you must first determine the total amount paid towards the insurance policy. This includes all the premiums you have paid over the years. Next, you need to find out the surrender fees or charges that will be levied by the insurance company. These fees vary and depend on the type of policy, the age of the policy, and the insurance provider. For instance, surrender charges can start as high as 10% to 35% of the policy's cash value for the first 10 to 15 years and then decrease over time.

Once you have the total payment amount and the surrender fees, you can calculate the cash surrender value by subtracting the fees from the total payments. This will give you the actual payout you would receive if you decide to cancel your life insurance policy. It is important to note that the cash surrender value may be lower than the current cash value of the policy due to these fees and charges.

Additionally, it is worth mentioning that there are two types of life insurance surrender values: guaranteed surrender value and non-guaranteed surrender value. The guaranteed surrender value is available after three years of holding the policy and is usually around 30% of the premiums paid, excluding the first year. It increases to 50% between years 4 and 7, and after year 7, the insurance company will make unique calculations based on your circumstances. The non-guaranteed surrender value reflects the value of investments and bonuses associated with the policy, in addition to the premiums paid. This amount can be higher than the guaranteed surrender value, especially if the policy has been held for many years. However, the penalties for surrendering the policy are the same or greater.

Understand the difference between the value for a sale and the death benefit

When it comes to life insurance, it's important to understand the difference between the value for a sale and the death benefit. The death benefit refers to the amount of money that the insurance company will pay out to your beneficiaries in the event of your death. This is typically a tax-free transfer and can be used by your beneficiaries for any expenses they may have. The death benefit amount is usually indicated as the "face value" or "face amount" on your policy and is often used interchangeably with the value of the policy.

On the other hand, the value for a sale, also known as the cash value or surrender value, is the amount of money you can get if you choose to sell your policy before your death. This option allows you to convert your policy into a lump sum of cash that you can use for various financial goals, such as retirement, college expenses, or emergency funds. However, it's important to note that the value for a sale will always be lower than the death benefit to allow the buyer to profit.

The cash value of a life insurance policy is calculated based on the total amount of premiums paid, minus any fees or charges, and takes into account the length of time the policy has been active and the size of the death benefit. The longer you've had the policy and the higher the death benefit, the higher the cash value is likely to be. Additionally, the cash value can grow over time due to interest or investment returns, depending on the type of policy you have.

When deciding between prioritising the death benefit or the cash value, consider your financial goals. If providing financial security for your family after your death is your main concern, maximising the death benefit may be more important. On the other hand, if you're looking at life insurance as an investment for your own needs, the cash value may take precedence. Discuss your options with your insurance agent to understand how to balance these two benefits within your budget and ensure you're getting the most out of your policy.

Consider the tax implications

The cash value of life insurance is generally not taxable as it grows within the policy. However, there are some instances where you may have to pay taxes on it. Understanding the specific rules and consulting a tax advisor for guidance is essential. Here are some key points to consider:

• Withdrawals: You can generally withdraw an amount equal to your total premium payments without owing taxes. However, once your withdrawals exceed this amount, you will typically owe income tax on those withdrawals. Withdrawals from a modified endowment contract may also be subject to taxes.
• Policy loans: Taking out a loan against your cash value is usually not taxable. However, if the policy lapses or is surrendered with an outstanding loan balance, you may owe taxes on the unpaid loan amount.
• Cashing out/Surrendering: Surrendering or cashing out your policy may incur taxes if the cash value you receive is greater than the total premium payments made.
• Interest earned on beneficiary proceeds: If beneficiaries receive interest on the proceeds of a policy, this interest is generally taxable.
• Modified endowment contracts (MECs): If your policy becomes an MEC, which happens when your premium payments exceed certain limits, there may be additional tax implications. Withdrawals and loans from an MEC may be taxed differently than from a regular policy.
• Life insurance death benefit: The death benefit paid to beneficiaries is generally not taxable. However, if the beneficiaries owe estate or inheritance taxes or if the estate is named as a beneficiary, taxes may be owed. Additionally, if the benefit is paid out in installments, the funds yet to be distributed may accrue taxable interest.

It is important to note that the tax implications of life insurance can be complex and depend on your specific situation. Consulting with a tax advisor or financial professional is highly recommended to understand the potential tax consequences of any actions you take regarding your life insurance policy.

Weigh up the pros and cons of cash value life insurance

Weighing up the pros and cons of cash value life insurance is an important step in deciding whether to take out this type of policy.

Pros

Cash value life insurance policies have a savings component, allowing you to build wealth on top of your life insurance protection. There are no annual contribution limits, and you can borrow, withdraw, or use your cash value to cover premium payments. The cash value also grows tax-deferred, so you don't owe income tax on gains as long as the money remains in your policy.

Cons

Cash value life insurance policies tend to be more expensive than term life insurance policies. They often require a hands-on management approach, and the cash value can take a long time to build up. Withdrawing money or taking out loans against the cash value can reduce the death benefit paid to your beneficiaries, and there may be tax implications if you withdraw more than you've paid in premiums.

It's important to carefully consider your financial goals and risk tolerance when deciding whether cash value life insurance is right for you. Consulting a financial advisor can help you weigh the pros and cons and make the best decision for your needs.

Frequently asked questions