How Cash Value Life Insurance Works
Updated December 4, 2020 . AmFam Team
You most likely purchased life insurance for the financial protection it provides your loved ones in the event of your death — but there can be some additional benefits to life insurance. Some life insurance policies, such as DreamSecure Whole Life Insurance offers the opportunity to build “cash value,” otherwise known as a living benefit.
That living benefit is the value in your policy that may be borrowed against or paid out if the policy is surrendered before death.* Let’s take a closer look at how cash value in life insurance works.
What Is Cash Value in Life Insurance?
Cash value is typically a feature of whole and universal life insurance policies. The policy’s cash value grows over time and can earn interest — and you may be able to borrow against it if the need arises. Note that you will be charged for doing so. If you were to pass away with outstanding loans, your death benefit will be reduced accordingly.The cash value in your life insurance policy grows on a tax-deferred basis. That means you don’t have to pay taxes on that growth while the cash value remains in your policy, but you might have to pay income tax if you withdraw the cash value.**
Here’s a list of American Family Life Insurance Company policies that can gain cash value:
- DreamSecure Whole Life Insurance
- DreamSecure Flexible Life Insurance
- DreamSecure Children's Whole Life Insurance
- DreamSecure Senior Whole Life Insurance
How to Withdraw Cash Value
Did you know that you can withdraw cash from a whole or universal life policy? You can tap into your cash value from a life insurance policy for any purpose.
Taking out a loan
When you’ve built up enough cash value, you could take out a loan against your whole life or universal life policy.* People might choose to borrow against their policy to help with things like college tuition, a down payment on a home, emergencies or other life-changing events.
Keep in mind, if you borrow against your policy, any unpaid loan and interest is subtracted from the proceeds at the time of death or from the cash value if surrendered. If the loan and interest due becomes too large over time, there is a risk that the balance due could force the policy to end.
Withdrawals
Universal, life policies may allow you to withdraw an amount less than the surrender value of the policy.* This is sometimes called a partial surrender. Some companies charge surrender fees and taking a withdrawal could have additional consequences for your policy. Be sure to look at your policy before deciding to take a withdrawal.
Surrendering your contract
If you cancel your life policy, you’ll receive the accrued surrender value and can use the cash any way you want. Going this route means you may be charged surrender fees, which could reduce your cash value. And, if you surrender your whole life or universal life policy, the earnings could be subject to income tax.
What Happens When You Surrender Your Life Policy?
Another important thing to note is when you surrender your life policy, you may get the cash you need when you need it, but you’ll no longer have the death benefit, which is the amount your beneficiaries would receive upon your death.
Trying to replace that death benefit later by getting coverage again could be more expensive down the road. And health changes could mean you wouldn’t qualify for a new policy, so be sure to talk with your insurance agent about the consequences of surrendering your life insurance policy.
Face Amount Vs. Cash Value in Life Insurance
You may have heard of the term “face amount” of life insurance, but don’t confuse this term with cash value. The face amount of life insurance is actually just another term for the coverage amount purchased. The death benefit is the amount that a named beneficiary receives upon the death of the insured.
The death benefit could be more or less than the face amount (depending on things like outstanding loans on cash value or nonguaranteed dividends). The cash value is an entirely separate benefit within the same policy.
In fact, the cost for a cash value life insurance policy is actually more expensive than a term life policy because part of the premium goes toward paying for the death benefit, while a portion goes toward the cash value growth. Check out our life insurance glossary of terms to better understand life insurance terms and definitions.
Get Protected With Life Insurance
There’s no time like the present. Act today to help protect your loved one’s tomorrows. Learn about why you may need a life insurance policy and the various types available at through American Family Life Insurance Company today.
Need more info? An American Family Insurance agent (Opens in a new tab) is happy to answer any of your questions.
This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. DreamSecure Whole Life and Flexible Life Insurance policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.
*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value if surrendered. If the loan balance grows too large for the cash value to support it, the policy could terminate.
**Neither American Family Life Insurance Company nor its agents are authorized to give tax or legal advice, and this should not be construed as such advice. Customers should consult a tax advisor for answers to tax questions.
Policy Forms: ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-227 WL, L-227 (ND) WL, L-227 WL, ICC17-223 WL, L-223 (ND) WL, L-223 WL, ICC17-224 WL, L-224 (ND) WL, L-224 WL, ICC17-228 WL, L-228 (ND) WL, L-228 WL, ICC21 L141 MS 01 22, L141 ND 02 22, L141 SD 02 22
Related Articles
- Life Insurance for Children
You understand the importance of providing a secure financial future for your loved ones, and purchasing a life insurance policy on a child (with the ability to transfer ownership of the policy in the future when the child becomes an adult) can help you do just that. Let’s take a look at how a life insurance policy can help you proactively protect your loved one’s financial future.
Why Is Children’s Life Insurance a Good Purchase?
A life insurance policy is a purchase that can last a lifetime. Whether you purchase it on your child or grandchild, there are a number of benefits.
Low premiums
Since the cost of life insurance depends largely on things like age and health, purchasing a life policy when they’re young can lock in a low premium for the entire policy payment term.
Protect their ability to secure life insurance in the future
One of the biggest benefits of buying life insurance on a child is protecting their ability to secure life insurance in the future. When purchasing a permanent life policy on a child, your policy might include (if not, you might have the option to add) a Guaranteed Purchase Option (GPO) benefit to ensure the opportunity to purchase additional life insurance on them at certain ages and life events down the road without a medical examination or proof of health.
Build cash value
A permanent life insurance policy has the ability to accumulate cash value year after year. The earlier you start, the longer cash value can build, so when you purchase a life insurance policy for children when they’re young, the cash value has a lot of time to grow before they may need to use it. And, if ownership has been transferred to the adult child, they can even borrow against their cash value* if needed.
Should I Purchase Permanent Children's Life Insurance?
If you’re purchasing life insurance on a child, most people select permanent life insurance since it is built to last the child’s entire life. A permanent life insurance policy provides not only a death benefit, but, as mentioned before, the policy also has living benefits, like the ability to accumulate cash value.
Purchasing life insurance can be a practical and simple way to help protect your loved ones’ dreams. Check out American Family Life Insurance Company’s DreamSecure Children’s Whole Life permanent life insurance policy to learn more. Or you can also check in with an agent — they’ll be able to answer any questions you may have about children’s life insurance options through American Family Life Insurance Company.
This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. DreamSecure Whole Life Insurance policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.
*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value if surrendered. If the loan balance grows too large for the cash value to support it, the policy could terminate.
Policy Forms: ICC17-223 WL, Policy Form L-223 (ND) WL, Policy Form L-223 WL, Policy Form ICC17-224 WL, Policy Form L-224 (ND) WL, Policy Form L-224 WL
- The Difference Between Annuities and Life Insurance
What’s the difference between life insurance and annuities? It’s a common question. If you wonder what it takes to secure a financial future for yourself and those you love, it may be one you find yourself asking. And that’s a very good thing.
The bottom line: life insurance can help provide your loved ones with the financial peace of mind they deserve if you were to pass away. Annuities provide a tax-deferred way to grow money and provide an income stream. Both should be considered as part of a long-term financial plan.
Although both share some similarities, the overall purpose of each is very different. Let’s take a quick look.
Life Insurance Helps Protect Their Financial Future
When comparing life insurance and annuities, the biggest difference is that life insurance is designed to help protect against a financial loss for others after your death. Annuities on the other hand help protect you financially while you’re still alive.
Life Insurance helps to financially secure your loved ones’ future, since the death benefit can help with things like replacing your income and meeting important financial needs such as:
- Funeral costs
- Daily living expenses
- Mortgage payments
- College funding
When you purchase life insurance, you aren’t purchasing it for you — it’s really a purchase for the people you want to take care of.
If you want to find the right life insurance for you and your loved ones, American Family Life Insurance Company has the customized options you're looking for. If you want to learn even more life insurance, read up on the specifics of how life insurance works.
Annuities Help Prepare You for the Future
Think of an annuity as a tool that could help meet your retirement needs. The primary purpose of annuities is to create income for you, and this can be done in a few different ways. You can set up payments that last for your entire life, a specific period of time or a combination of both.
There are many potential benefits of annuities. Some include:
- The ability to grow account value on a tax-deferred basis
- The potential for a future income stream that can’t be outlived
- The possibility of a lump sum benefit that can be paid to a surviving spouse
How do annuities work?
You can buy an annuity by giving your insurance company either a single lump sum or making payments over time. The insurance company then invests your money — referred to as a premium or purchase payment — in different ways depending on the type of annuity you select.
You can buy an annuity that begins making payments back to you right away — this is called an immediate annuity — or if you prefer, annuities are available that delay making payments to you for an extended period, sometimes many years.
Start Planning for the Future Today
Life insurance and annuities work in tandem to protect a future for yourself and those you care for. Now that you have a high-level overview, discuss with your agent how these options fit your needs.
Annuities are long-term insurance contracts intended for retirement planning. Annuities are issued by Protective Life Insurance Company located in Nashville, TN, with administrative offices at 2801 Highway 280 South, Birmingham, AL 35223, through a relationship with American Family Brokerage, Inc., 6000 American Parkway, Madison, WI 53783.
- How Often Should You Review Your Life Insurance?
When you think about why buying life insurance is important, you probably think of financially protecting your family and loved ones in your life when you pass away. With life insurance in place, you can help ensure financial support for those that matter most. But have you spent time reviewing your life policy and ensuring it still meets your needs since purchasing it?
We recommend reviewing your life insurance every year. Having the right coverage in place means less for you — and those you care for — to worry about. Because so much can happen in 12 short months, it's important to make sure your policy is right for you and your family today.
To get you started, we’ve put together a list of 9 key reasons why you should review your life insurance policies every year.
- How Cash Value Life Insurance Works
You most likely purchased life insurance for the financial protection it provides your loved ones in the event of your death — but there can be some additional benefits to life insurance. Some life insurance policies, such as DreamSecure Whole Life Insurance offers the opportunity to build “cash value,” otherwise known as a living benefit.
That living benefit is the value in your policy that may be borrowed against or paid out if the policy is surrendered before death.* Let’s take a closer look at how cash value in life insurance works.
