All about Cash! Taking a Look at the Cash Value of a Life Assurance Policy

The Cash Value of the policy is the cash build up in that results from a portion of your premiums being set aside to grow by earning interest. The cash value is allowed to grow on a tax-deferred basis. That means that as long as the funds stay in the policy, taxes will not be levied on it. This allows the cash value to grow steadily and in the latter life of the policy, will provide the policy holder with a substantial amount.

When you have grown a big enough cash value, you can use the cash value of a life assurance policy in various ways:

  • Accumulate interest.

    You can let the cash value stay where it is, where it will earn interest. The interest is based on the performance of the company’s investments, which may come from earnings from mortgages, dividend-paying stock or bonds. The advantage of allowing cash value to grow within the policy is that earnings are tax deferred up to a certain point. You only need to pay taxes once you withdraw the money or you receive it as a lump sum amount upon your policy’s maturity.

  • Withdraw cash.

    This is for participating policies, or policies that pay out dividends. You are allowed to take out the accrued dividends, up to specified limits. Once you make the withdrawal of the dividends, you in turn surrender the cash value linked to that portion of the dividends.  Please take note that if you withdraw from the cash value, you may need to make some premium payments in order to ensure that the policy remains effective.

  • Take out a policy loan.

    The concept is similar to your taking out a loan against the equity of your house. You can also apply against your policy’s cash value. You need to make this application with your insurance company. Interest will be charged on the loan and any unpaid amounts (plus interest and fees) will be deducted from the proceeds of the life assurance should the Insured die and the beneficiaries make the claim. The advantage of a policy loan is that the interest charged is usually lower than what banks may charge for a loan.

  • Pay for your premiums.

    In this case, your policy is considered paid up, since the existing cash value will be the one to cover for future premiums. However, changes in the expected rate of dividends, as well as cash value withdrawals will affect a policy’s being paid up and you may need to make some premium payments to ensure that the policy stays in force.

Tax Implications

Please note that there may be some tax consequences in your actions, especially if you are withdrawing the cash value. Taxes on the cash value’s interest build up are only tax-deferred as long as the money remains within the policy. You see, dividends provided to the policy are counted as a “return of premium”. It will only be taxable when the dividends are more that the premiums you have already paid.

Premium Payments

If you decide to stop paying the premiums, the cash value may be enough for you to get reduced paid up coverage or to provide for extended term insurance.

To protect your loved ones for less, fill the form on the right to get your life insurance quote.