Is there a clear answer about whole life insurance and the cash value? Does the cash value get paid out, or is it capped at the face value? For example, if you have a $1M policy and the cash value grows to $25M, do your heirs get $25M or just the $1M?
Are you talking about whole life or universal life? In whole life, the cash value must eventually meet the face value by the time you reach 121 years old. If you live that long, you get what’s called an endowment. So the cash value always stays below the face value.
Whole life companies mostly make money through long-term bonds, policy loans, and sometimes selling other products like IUL. I’m not sure what you mean by a ‘bull market.’ Whole life doesn’t work that way, but it also doesn’t get hurt by market crashes.
I don’t understand why, after building up cash value over 20-30 years, you can’t just withdraw it as cash without it being taken from the death benefit. Is that correct?
Zen said:
I don’t understand why, after building up cash value over 20-30 years, you can’t just withdraw it as cash without it being taken from the death benefit. Is that correct?
That’s because it’s insurance, not an investment. If you want an investment, there are other options. The cash value has special tax treatment, which is why you can’t just withdraw it freely.
But honestly, between paid-up additions and the fees that come with some policies, you don’t need to worry about the market affecting your policy like that.
Zen said:
I don’t understand why, after building up cash value over 20-30 years, you can’t just withdraw it as cash without it being taken from the death benefit. Is that correct?
The cash value helps pay part of the death benefit. If you reach 121, your premiums and interest basically become the death benefit. Anything short of that means the insurance company uses the cash value to help pay the difference between what they owe and what you’ve accumulated.
You can always surrender the policy and get the cash value, but you give up the future death benefit if you do that.
Zen said:
I don’t understand why, after building up cash value over 20-30 years, you can’t just withdraw it as cash without it being taken from the death benefit. Is that correct?
Yes, that’s correct.
There are two death benefit options. One pays the cash value plus the death benefit, which is called an increasing death benefit. The other is a level death benefit, where the cash value grows but doesn’t increase the death benefit, it just reduces the amount of risk the insurance company is carrying.
So with a $1M policy, if the cash value increases by $100k with the increasing option, the death benefit would increase by about $100k. With the level option, the cash value increase just lowers the amount at risk for the insurance company.
If the policy’s cash value grows a lot, it can trigger something called the ‘corridor,’ which increases the death benefit to make sure the policy still counts as life insurance. So yes, if the cash value in a $1M policy grew to $25M, the death benefit would also grow to match or exceed the cash value.
The market doesn’t affect whole life. These policies are usually funded by dividends from the insurance company.
Whole life insurance doesn’t really have a ‘bull market’ like stocks. But death benefits can definitely grow over time, especially if you’re with a mutual company and get dividends. Those dividends can be used to buy more paid-up additions, increasing the death benefit. You can also add extra premiums to the policy to increase the death benefit.
The death benefit can grow, but it sounds like you might be thinking of variable life insurance, not whole life. Unfortunately, most people don’t know the difference between these terms. It’s like calling a bond a stock, or a mutual fund an ETF.
Variable universal life (VUL) can lead to significant cash value growth because the premiums are invested in funds. You could see millions in cash value if the market performs well, especially by the time you’re 80 or 90.
At death, the higher amount is paid out—either the policy amount or the cash value, whichever is greater.
Aris said:
At death, the higher amount is paid out—either the policy amount or the cash value, whichever is greater.
In what case would the cash value ever be higher than the death benefit?
@Skylar
You should request an in-force illustration to see the projections. But if you’re talking about a $1M policy with $25M in cash value, that doesn’t sound like a typical whole life policy.