Life Insurance and Cash Accumulation

Traditionally, the primary purpose of life insurance was to protect the insured’s family from financial hardship in the event of the insured’s death. As the life insurance industry evolved, the complexity of many of the products increased. Now there are a myriad of life insurance policies that allow the policyholder to use life insurance as an investment. This page provides a detailed overview of key terms and answers related to life insurance and cash accumulation.

Life Insurance and Cash Accumulation: Background

Life insurance policies can be split into two types of plans.

Term Life Insurance has lower initial rates, but the premiums increase over time (see the pic below). These plans generally do not build a cash value

Permanent life insurance, has higher initial premiums but the cost is generally level (see the pic below) and offers a variety of cash accumulation options.

We have collected the most frequent questions related to cash accumulation by life insurance policies. Please enjoy the information below and let us know if you have additional questions.

What type of life insurance has cash value?

Most permanent life insurance policies build a cash value. The reason behind this is that traditional permanent policies have a level premium that spans the insured’s lifetime. The insured is paying a higher premium in the early policy years, and in return, their premiums remain level throughout their lifetime. Traditionally, this extra premium was held in the form of a guaranteed cash value, which the insured could access via a policy loan or surrender.  

There are several types of permanent life insurance policies:

  1. Whole Life Insurance is often viewed as a simpler type of permanent insurance because its premiums are fixed and because it often offers guaranteed benefits so that you know exactly what you will receive.  

Many whole life policies also produce a dividend, which generates a variety of options for the insured.  Whole life insurance is generally sub divided into non-participating and participating whole life policies.  Non-participating whole life insurance policies do not generate an annual dividend for its policy holders. Participating whole life insurance policies do generate an annual dividend. The annual dividend allows the insured to share in the profitability of the insurance company. Dividend rates can fluctuate from year to year, and there is no guarantee that the company will pay a dividend in a given year.

  1. Universal life insurance, another popular form of a cash value life insurance policy, separates the investment portion from the life insurance portion, and some policies literally offer dozens of investment options. The main difference from whole life insurance is that universal life insurance offers you more flexibility – you can decide what amount you want to contribute throughout the policy’s life, and you also have a wide variety of investment options.  
  1. Certain Term 100 life insurance policies also generate a guaranteed cash value that escalates at each policy anniversary. 

Here is a quick comparison of all major life insurance types:

Insurance policy…

Term Life Insurance

Whole Life Insurance, Non-Participating

Whole Life Insurance, Participating

Universal life Insurance

Term 100 Life Insurance

… considered a Permanent Life Insurance

No

Yes

Yes

Yes

Yes

… provides protection if you die

Yes

Yes

Yes

Yes

Yes

… accumulates cash value

No

Yes

Yes

Yes

Sometimes

… allows you to adjust the premiums you pay

No

No

No

Yes

No

… offers a stable level of premiums

Increases with age if you get a new term policy

Constant

Constant

You can adjust

Constant

… requires you to pay premiums

During the term duration, e.g. Term 20 – for 20 years

Lifelong

Lifelong

Lifelong

Until you are 100 (basically, lifelong)

… pays annual dividends

No

No

Yes

No

No

      

Policy costs

Very low at the beginning but can sharply increase towards the end of your life

High

High

Can vary depending on your decisions

In most instances lower than other Permanent policies

What is the cash value of a life insurance policy?

The cash value of a life insurance policy is value that your policy has accumulated since the policy issue date.  The policy owner can often access this value via the surrender of the policy, a loan or partial withdraw. Note that not all policies offer all the access to cash options, so the policy contract needs to be consulted.

The cash value within a permanent or whole life policy is often broken down into two parts: the guaranteed cash value and the dividend cash value. 

  1. The guaranteed cash value can be taken out as a policy surrender or as a policy loan.
  2. The dividend value, which exists only in participating whole life policies, can be taken out as a withdrawal policy surrender or policy loan.

The amount available via loan and loan interest rate formulas varies from company to company and even contract to contract, so make sure you understand your policy.

What is the cash surrender value of life insurance?

The cash surrender value of life insurance is basically the same as the cash value of a life insurance policy. It is an amount that an insurance company pays when you decide to “surrender” your insurance policy back to the insurance company. In this context, “surrender” is another word for terminate or return. Thus, it is a cash value that your policy has accumulated since its inception.

Buyer beware – certain policies have policy fees and surrender charges. This amount will be deducted from the cash you receive.  Also, be aware of any potential taxable gains.  If you have questions, be sure to ask and get your answers in writing.

How to calculate the cash value of life insurance

 The cash value of your insurance is typically shown on your statement together with your surrender cash value.

An example on the left illustrates where you should be searching for this value in your policy. A section called guaranteed cash value highlights the amount your policy has accumulated over time. 

If you are not sure about the number, your insurance company or insurance broker should be able to provide this figure.  Make sure you get it in writing.

What is term life insurance cash value?

The cash value in term life insurance is generally zero since traditional term insurance does not have a cash accumulation component.

How to cash out life insurance?

Cashing out life insurance is easy – you will need to let your insurance company know that you want to surrender your policy. It is important to know, though, that before you do that, you should read all the details of your policy to understand the financial consequences and, in particular, what will be your “net surrender cash value,” inclusive of any fees.  For whole life policies, consider surrendering after the annual dividend has been declared, otherwise you may be leaving money on the table.

Buyer beware – Be aware of any potential tax consequences from the surrender of your policy and review your life insurance needs with a qualified life insurance broker first.

How to borrow from your life insurance’s cash value

Most cash value policies have a policy loan feature.  The insurance company is essentially letting you borrow this value while keeping the policy in force.  But this comes at price; each insurance company and each policy contract has a stipulated interest rate.  Be sure to verify what that is.  

Please see an example on the left of a policy statement that also includes a loan.

Buyer Beware – If your loan value escalates beyond a certain point (often 90 per cent), the policy can terminate because the loan intertest rate is typically higher than the dividend paid with whole life policies.

What happens to the cash value of life insurance when you die?

That’s where you should be really careful. It is EXTREMELY important to know that, if you die, depending on the type of policy:

  • In most cases your beneficiary will not receive the entire cash value on death of the insured. For instance, participating whole life policies often have a paid-up additions option (PUA) in which case the dividends purchasing more insurance pay out on top of the basic death benefit. However, the guaranteed cash value on these policies remains with the insurance company. 
  • With universal life insurance, it depends on the type of policy – some policies have level death benefits, and some policies have an increasing death benefit (the face amount plus the accumulated funds).  

How to cancel cash value life insurance

If you want to cancel your cash value life insurance, it basically means that you are “surrendering” it. There will be a net amount that you will receive when cancelling, called the surrender value. This takes into account any fees or surrender charges.  This amount does not factor into any taxable gains which may apply. Buyer Beware – many Permanent life insurance policies have surrender penalties on the cash value some extending as long as 15 years.  It is linked to the cash value your policy has accumulated over time.