What Happens to Cash Value in a Whole Life Policy at Death?

Cash Value Whole Life Insurance: What Happens When You Die?

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Whole life insurance is a type of permanent life insurance. When you pay your premium, part of the money goes toward the death benefit. The rest of the money goes into a savings account, making up your policy’s cash value. This cash value grows over time, and you may be able to access this amount during your lifetime. 

But what happens to this money when you pass away? Below, we’ll dive further into how cash value works both when you’re alive and after you’ve moved on.

Key Takeaways

  • Whole life insurance cash value grows throughout the life of your policy.
  • This cash value provides a living benefit you can access while you’re alive.
  • When you pass away, your beneficiary typically receives only the death benefit.
  • Universal life insurance policies have an option for beneficiaries to receive both the cash value and death benefit.

What Is Cash Value?

Cash value is a feature of permanent life insurance policies, including whole life insurance. Its purpose is to help offset the increasing cost of insurance as you age, but you may be able to access or otherwise leverage it while you’re alive.

A portion of your premium is deposited into an account that earns a rate of return and grows over time—this is the cash value. With whole life insurance, these values are determined in advance and stated in the policy.

Other types of permanent life insurance, such as universal life and variable policies, credit the cash value with a rate of return that can fluctuate depending on prevailing interest rates and investment performance, respectively.

Since you can often access this money while you’re still alive, cash value can be thought of as a type of living benefit. However, cash value takes years to accumulate. And during the first several years of the policy, a surrender charge is often assessed if you make withdrawals from the cash value. This period can last 10 years or longer, depending on the policy.

If you withdraw too much, or take out a loan against the cash value and can’t pay it back, the policy could lapse. This means you lose your coverage and your beneficiary won't receive any money when you die. Talk to your insurance agent to understand the risks and penalties before making a withdrawal.

Types of Permanent Life Insurance

While all permanent life insurance is designed to last your whole life, there are different types of permanent life insurance. Some have additional options for how the cash value is handled at death.

Whole Life Insurance

With whole life insurance, you pay the same premium for as long as you keep the policy. This means your payments won’t increase as you age. The policy stays in effect for your whole life, unless you cancel it or stop making payments. Some whole life policies pay dividends, which you can use to increase the cash value and the death benefit.

The cash values for a whole life insurance policy are determined when the policy is issued; they are listed in the policy documents.

Universal Life Insurance

Universal life insurance is another common type of permanent insurance. It offers more flexibility than whole life insurance, since you have options to adjust your premium and the death benefit. Unlike whole life insurance, you can go without making premium payments if there is sufficient cash value; the insurance company will pull the premium payment from your cash value.

The cash values are not determined when the policy is issued, but fluctuate according to current interest rates. It’s possible you could need to pay additional premiums to maintain the policy in later years.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance in which you can invest the cash value in mutual-fund-like subaccounts. Variable policies can be either universal or whole life insurance policies.

Since market investments aren’t guaranteed against loss, your cash value could decline and you could be required to contribute additional premiums to keep the policy from lapsing. If you need guaranteed life insurance coverage, this type of policy is probably a poor choice.

Indexed Life Insurance

With indexed universal life insurance, the cash value is credited a rate that is determined by the performance of a market index like the S&P 500. However, you typically only get to partake in a portion of market gains. These policies tend to be very complicated. And though you’re protected against market losses, policy expenses can diminish the cash value such that you may need to increase premiums to maintain the policy.

If you need life insurance for a certain number of years only, consider term life insurance, which lasts for a set term, such as 10 or 30 years. It’s much cheaper than whole life and other forms of permanent life insurance.

What Happens to Cash Value in a Life Insurance Policy at Death?

With whole life insurance, your beneficiary typically receives only the death benefit that’s stated in the policy. Consult your plan to know what your terms and options are, especially if you’ve built up a large cash value. 

However, with universal life insurance policies (which may also be indexed or variable), you can choose between two universal life death benefit options:

  • Level death benefit: This is also known as option A or option 1. The death benefit is designed to stay level throughout the life of the policy. With this option, your beneficiary receives the death benefit amount only and not also the cash value.
  • Increasing death benefit: This is also known as option B or option 2. In this case, the death benefit increases as the cash value does. This death benefit equals the cash value plus the death benefit your policy was issued with. Your beneficiary does receive the cash value in this case. This type of policy tends to be more expensive since your cash value isn’t used to offset insurance costs.

How To Access the Cash Value

While you’re alive, there are four primary ways to access the cash value portion of your life insurance:

  • Request a withdrawal: Depending on your cash value, you may be able to make a tax-free withdrawal. However, this option could have tax implications if you request more money than you’ve paid in premiums. It can also reduce the death benefit for your beneficiaries.
  • Take out a loan: You may have the option to take out a loan from your cash value. However, you’ll need to repay this (with interest) or it will be subtracted from the death benefit when you die.
  • Surrender the policy: You may be able to surrender a whole life policy for its cash surrender value. This option allows you to access the cash value minus any fees. However, it cancels the death benefit so that if you die, your beneficiary won’t receive any payment.
  • Apply the cash value to premiums: Universal life insurance and some whole life policies allow you to put your cash value toward premiums, which is helpful when money is tight. However, make sure not to deplete the cash value too much. Otherwise, your policy could lapse.

Frequently Asked Questions

Is whole life insurance worth it?

Whole life insurance is more expensive than other insurance options. Some people prefer it because a whole life’s cash value allows you to have a living benefit. Speak to an insurance agent or financial planner to see which life insurance is right for you.

Can you cash out a whole life policy?

You may be able to surrender a whole life policy for its cash surrender value. This option allows you to access the cash value (minus any fees). However, it cancels the death benefit so that if you die, your beneficiary won’t receive any payment.