Whole Life Cash Value Vs. Face Value

Two common terms associated with a whole-life insurance policy are "cash value" and "face value." While both terms refer to benefits offered by the policy, they mean very different things to you, the policyholder, as well as to your beneficiaries.

Whole Life Cash Value

With a whole life policy, a portion of your premium goes toward paying the cost of the insurance, while the rest goes into a cash fund that accumulates tax-deferred interest over time. The amount of accumulated funds at any given time is referred to as the cash value. The face value is the amount of insurance proceeds the policy pays to your beneficiaries upon your death. Therefore, the face value is also referred to as the death benefit.

Implications When You Die

While your beneficiaries receive the face value of your whole life policy when you die, they do not receive the accumulated cash value. For example, if you own a whole life policy with a face value of $100,000 and an accumulated cash value of $14,000 at the time of your death, your beneficiaries only receive the $100,000. The $14,000 remains with the insurance company.

Exploring Your Policy's Living Benefits

Although the cash value does not contribute to the death benefit provided by the policy's face value, it does offer certain benefits while you are alive. You can borrow funds from the cash value at virtually any time and for any reason. Cash value loans offer a relatively low interest rate and don't have to be repaid.

You can also receive the cash value by surrendering, or "cashing in," the policy. However, this terminates your life insurance coverage, and the insurer will subtract any applicable surrender charges from the cash value. After a certain amount of time, your cash value will reach the same value as your surrender value, effectively reducing any fees you'd pay for taking that money out. At that time, it might be worth considering.

Reducing the Death Benefit

Although borrowing from your policy's cash value will not terminate your coverage, it will reduce the amount of the death benefit if it has not been repaid upon your death. Suppose you have a whole life policy with a face value of $50,000 with an outstanding loan balance of $4,000 when you die. Instead of paying the full face value of $50,000, your insurer will only pay $46,000 to your beneficiaries. Your insurer will also deduct any unpaid loan interest.

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