This is essential to have a decent understanding of cash surrender value of life insurance when you purchase a whole life policy. In this article, we will cover few important things and make this clear to you.
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Why Would Cash Surrender Value of Life Insurance Decrease?
There are two main reasons why the cash surrender value of life insurance would decrease;
- Cash value is paying your policy premiums
- Premiums not keeping up with the cost of the insurance
If you elected to have the cash value add to your premium payments and the premiums were not sufficient by themselves to keep the life insurance in force, then the cash surrender value will drop over time. The same goes if the cost of the insurance itself is growing due to its age and your premiums are not keeping up such as with indexed universal life insurance.
Does Term Life Insurance have a Cash Value?
For the most part, no. Only whole or permanent life insurance builds up a cash value over time as that is part of the policy’s features. Term life insurance is fixed which means that it does not build up a cash value. Although there may be some insurance companies which offer exceptions that allow cash value to build up with term life coverage, the general rule is that once you have lived past the term that the insurance covers it disappears. The exceptions to the rule are few and far between, but you may want to check with your insurance company to see if they offer such policies.
Life Insurance Policy Account Value vs. Surrender Value:
The account value is the building cash value of a life insurance policy based on the premium payments that you make. The life insurance company invests some of the premiums you pay with the expectation that it will raise its value. With some policies, you can choose the investments to make.
Surrender value is really the charge life insurance companies place on their policies if you cash them out before they mature. The longer you own the policy, the lower the surrender value becomes until it matures. Once the policy matures, the surrender value disappears.
How Does Cash Surrender Value Life Insurance Work?
The cash surrender value is essentially the money paid by the insurance company to the policyholder if the policy is terminated voluntarily before it matures. The cash value is the savings part of the insurance policy which is based on the premiums paid and the returns from the investment that have accrued over the years.
For example, on a $500,000 life insurance policy if you have paid $20,000 in premiums and earned $5,000 in interests off investments, the surrender cash value would be $25,000 minus the surrender value charge which will vary from company to company.
Can I Take Loans against Cash Surrender Value of Life Insurance?
While each insurance company has its rules about loans on their policies, you can borrow an amount up to the cash surrender value, not the benefit level, of the policy from the insurer. You will be charged interest by the insurer on the loan which cannot be deducted for income tax purposes. Depending on the contract, there may be restrictions on the payment of dividends during the loan is still in-force. The policy may be terminated if the amount borrowed and the interest exceed the cash surrender value.