You may have heard this term and have no idea what it is, most do not unless someone has visited with them about permanent life insurance. Because I get asked about it a lot I want to simply explain to you what it is and make it a little easier to understand.
Permanent life insurance has cash value associated with the policy. In simplest terms, you pay your premium and they give you access and use to a certain amount of those premium dollars. In a whole life policy, these dollars are also earning you a guaranteed interest rate, paid to you by the life insurance company.
Cash value is there for these three reasons:
- If you should decide to cancel (terminate) the policy, the company will send back to you the amount that you have in cash value. Ex: If your cash value is $5,000 the company will send you a check for $5,000.
- The cash value is what you can borrow against should you want to take a loan against the policy. What I mean here is you can borrow money from the life insurance company up to the amount that is in your cash value. Ex: If the cash value is $5,000. The company will loan you up to $5,000. There are no restrictions on this money, you are able to use it for whatever you like and pay it back on your own terms.
- This cash value amount is also able to be withdrawn from the policy. Meaning it was not loaned but removed just like if you withdrew money from a savings account. Ex: If you have $5,000 and withdraw $3,000 you will only have $2,000 left in your cash value. This will also affect and lower your death benefit.