Cash Value Life Insurance Calculator

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

(5-minute read)

Life insurance policies can become obsolete or burdensome. If you have an unnecessary life insurance policy or are feeling a pinch with making your payments, there are options to turn to in order not to lose the investment you have already made with years of payments. One of these options is to access the cash value of your life insurance by selling a life insurance policy. 

Let’s take a look at what cash value is, how to calculate a life insurance payout, and what other options exist for a life insurance policy that is no longer needed or wanted. 

What Is Cash Value Life Insurance?

Cash value life insurance refers to a form of life insurance that functions a little bit like a savings account. It combines a death benefit paid to your family upon your passing and a savings or investment system. Policyholders typically pay a fixed-level premium, which is split between the cost of the insurance and a cash value account. Because this cash value account earns some interest (and the taxes are deferred), the cash value will actually increase over time. 

If you’re wondering, “Can I withdraw cash value from life insurance?” The answer is yes. Policyholders are able to access this cash value and can use it for a loan, cash, or to cover their policy premiums. You’re paying for longer-lasting coverage as well as cash contributions that you can withdraw from the insurance while you’re still living.

How Does the Type of Life Insurance Affect the Cash Value?  

It is important to understand that some types of life insurance policies may or may not include a cash value feature. Pay attention to cash value life insurance vs term, since term life insurance does not have cash value. If you are looking for a type of life insurance that may have cash value, you should be looking for:

• Whole life insurance is the most common type of fixed-rate permanent life insurance and it covers a policyholder’s entire life if the premiums are paid on time. There is a guaranteed minimum cash value growth.
• Universal life insurance uses market interest rates to grow cash value. It is also adjustable and you can choose the level of premium and death benefits. Just like whole life, there is a guaranteed minimum cash value growth.
• Variable universal life insurance is linked with the savings component of variable insurance policies based upon performance of an index and usually has a maximum limit and a minimum floor. The premium is flexible the same as universal life.
• Indexed universal life insurance allows you to profit from market gains in an index fund tax-free while avoiding the danger of losing money during a market downturn.

Because each type of life insurance operates based on different funds, it’s possible for the cash value to be calculated differently.

How Is the Cash Value of Life Insurance Calculated?

Unfortunately, there isn’t a simple answer for how to calculate the cash value of a life insurance policy. This is due to the way that cash value is accumulated for different types of policies. In many cases, the sum of premiums paid, the duration the policy has been in effect, and the value of your death benefit define the cash surrender value of a life insurance policy. Your life insurance company may have a cash value life insurance calculator to help you determine how much it is worth. 

For example, if you’re wondering, “What is the cash value of a whole life insurance policy?” The best way to calculate a life insurance payout is to consult your insurance company. This is because whole life insurance policies have guaranteed cash value accounts that will grow based on the insurance company’s formula. But, more specifically, you might be asking, “How do I find the cash value of my life insurance policy?” Most insurance companies will have a chart similar to this one:

Source: Investopedia

These charts will clearly show you how much cash value your whole life insurance has accrued. 

Variable and indexed universal life policies accumulate cash value differently. For variable policies, the cash is invested into sub-accounts that work like a mutual fund—the cash value grows or shrinks based on how well those sub-accounts do. For indexed policies, the cash is invested into a market index like the S&P, which pays interest according to that index without actually putting the cash value money into the market. 

If you want a growth in cash value, it’s also possible to receive dividends based on how much money you have. If an insurance company generates more revenue than it needs to operate, they will pay policyholders. However, dividends are not guaranteed and should not be relied upon.

Is the Cash Value of Life Insurance Worth It?

Cashing out a life insurance policy has several advantages that allow you to take control of your money. You may use the cash value to withdraw money or take a loan against it and spend it as you like. By receiving a cash value, you can:

• Make partial withdrawals to get cash as you need it. You can repay the balance to keep your death benefits the same.
• Borrow the policy like a loan that includes making payments and gaining interest until it is fully repaid.
• Sell the life insurance policy for an amount greater than the cash value amount.
• Pay for any medical bills that you’ve accrued.

Along with those benefits, purchasing life insurance, especially a cash value life insurance policy, can provide various tax advantages. And if you’re wondering, “Is the cash surrender value of life insurance taxable?” As with any sort of life insurance, the death benefit is tax-free to your beneficiaries. This is a significant benefit because life insurance payouts are typically quite big. If you borrow money against the insurance, you won’t have to pay taxes on the cash value amount as long as it is less than the premiums you pay. As long as the insurance is in effect, the loan is not taxable.

However, there are also some problems with cash value life insurance. 

• The cost of a cash value policy is higher than the cost of term insurance coverage.
• Fees may be extremely expensive and take away from the paid amount.
• There are less expensive tax-deferred investment options available.
• Cash value policies may be complicated and it can be difficult to navigate withdrawals.
• Any accumulated cash value will be returned to the insurance company and your family only receives the death benefit.

When it comes to cash value life insurance, there will be a variety of fees and penalties, and the returns will barely keep up with inflation. When you pay an insurance premium, remember that the money goes to three places: the death benefit, the cash value, and the insurer’s operational costs. Of course, only you can decide what policy is best for you, but there are other options available that might be better for your needs in the long term.

How Long Does It Take To Build Cash Value on Life Insurance?

You should expect to pay into your cash value life insurance policy for at least 10 years before you see any viability in taking cash out. However, these types of policies don’t reach the death benefits until you’ve paid into them for over 50 years. If your policy permits it, you can accelerate the accumulation of cash value by raising the size of your premium payments.

Is There an Alternative to Cashing Out a Life Insurance Policy?

Many people consider cashing in their life insurance policy in order to access the cash value through a loan or to get a cash payment. While this can give you a modest sum of money, another option to consider is selling your life insurance via a life settlement, due to the fact that a life settlement can typically net four to eight times its cash surrender value. Due to the increased cash payout, life settlements are a wonderful option for dealing with an unwanted or burdensome life insurance policy.  

Selling your life insurance policy via a life settlement allows you to treat your life insurance policy like a car, house, or any asset that you own and sell it to a life settlement company in exchange for cash. One major benefit of Life Settlements is that any type of policy is eligible—even term life insurance (the term policy must be convertible). The way Life Settlements works is that the investor gives you a cash payout, assumes the premiums, and then receives the death benefit. Life settlements can give you the cash you need to achieve your financial goals. 

To learn more about life settlements and see if you might qualify, visit our life settlement calculator. I am also happy to answer any and all questions about these life-transforming transactions.