Whole life insurance, universal life insurance, and variable life insurance are all types of permanent life insurance. Upon death, the cash value returns to the insurance company and any outstanding loans or previous withdrawals of cash value will reduce payments to your beneficiaries. In general, the cash value can only be used while you, the policyholder, are alive and it remains completely separate from the death benefit. Your beneficiaries cannot access it, even when you die.
Many policyholders don't take full advantage of the cash value of their permanent life policies, particularly if they no longer need the death benefit. However, if it is no longer necessary to transfer the death benefit to beneficiaries, the policyholder can access the accumulated cash value while alive. This can be done by waiving the policy in its entirety or by making smaller withdrawals or policy loans. The cash value can be used for a variety of purposes such as an emergency fund, to supplement retirement income, to pay premiums, and more.
People who prefer variable life insurance accounts are attracted to investment options and favorable tax treatment for cash value growth. If you apply for loans or withdraw funds from the policy, you must also ensure that you maintain a minimum level of cash value or your policy could expire. If you have accumulated significant cash value, you can also choose to apply for a loan against your policy. In addition, if it was withdrawn from the cash value, that amount will also be deducted from the death benefit paid.
Cash-value life insurance can be complicated and it's important to consult a financial advisor before incorporating it into your financial plan. It can also be used in conjunction with permanent cash value insurance as a combination of long-term and short-term protection for families or businesses. However, if you leave the cash value as it is, the death benefit of your policy will remain stable and your beneficiaries will receive the full lump sum. For example, if you took out a loan against the cash value of your policy and didn't return it, the insurance company will deduct it from the death benefit with interest.
Cash value is an attractive option for some life insurance buyers but it shouldn't be your first investment choice. If you have life insurance with cash value and you die, the life insurance company will absorb the cash value and your beneficiaries will receive the death benefit of the policy. The two main types of life insurance are term life insurance and total or permanent life insurance. With whole life insurance, universal life insurance and variable life insurance policies, you can withdraw money or apply for a loan against its cash value and use the money for whatever you want.
