Whole Life Insurance And The Cash Value

What you must know about whole life insurance and the cash value. Many times even after an insurance agent explains how it works people just do not understand. Cash value has some advantages and disadvantages that you need to be aware of.

First of all it takes many years for the account to accumulate cash in the amount that would help solve a financial problem or pay for a college education. Second the cash value in an accumulation account is not really yours to begin with. Although most agents will tell you it is in their presentation.

The best part of a whole life insurance policy is that it is provided to and individual to cover them for their whole life. They maintain a fixed premium and the cash accumulation account has a guaranteed rate of return. This means the insurance carriers are splitting the interest earn on the cash accumulation account with the policyholders.

The real reason for the cash value or accumulation account is to help fund the death benefit of the policy. It serves to offset the cost to the carrier when there is a death and they are required to payout the death benefit.

Let's see if we can make this easier to understand; Okay say at 20 years old you bought a whole life insurance policy with a death benefit of $100,000 thousand dollars.

Now move forward in time to age 65. The cash accumulation account has built up a cash value of $30,000 thousand dollars.

Now for any unexpected reason either illness or accident you die. The critical question to be answered is who gets the death benefit of $100,000 thousand dollars?

Most people say their wife or kids or whoever they have chosen to be their beneficiary. Which is fine and the carrier pays on submission of proof of your death.

Now! Your next question is who gets the $30,000 thousand dollars from the cash accumulation account. Here is where the answer gets a little sticky and the part people do not understand. The carrier uses that fund to pay out the $100,000 thousand dollars of the death benefit.

The cash value of accumulation part of the policy is what makes up the death benefit for payout to the beneficiary. Sometimes when an Agent makes the presentation for this it becomes easy for a person to misunderstand and think that the beneficiary would get both the death benefit and the cash accumulation. But remember this is not how whole life insurance was designed to work.

The next question about the cash value which you can get access to. Say you borrowed it to pay for college for your son. And borrow is the operative word and most often the carrier will charge about 8% for the use of this cash accumulation fund. It works somewhat like a loan and it can be paid back plus interest.

More often than now people take the cash value in the form of a loan never pay it back. And they really do not have to. So the next question is what happens to the death benefit when you die owing the payback on the loan.

The beneficiary would get the standard death benefit less the amount of the loan of the cash accumulation account plus interest.

Many insurance agents maybe very good at selling you the insurance but just do not fully understand the how whole life insurance works with the cash value. So a lot of times they do not fully explain the concept so the average person can understand it.