How Is the Cash Value of Life Insurance Calculated?

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

(3 minute read)

Calculating the cash value of a life insurance policy will depend on a variety of factors, such as policy type and number of premium payments. If you’ve been researching the benefits of selling your life insurance policy versus cashing in on cash value life insurance, you’ve come to the right place. 

In this blog, we’ll break down the basics of cash value life insurance, how insurance companies will use a cash value life insurance calculator to determine value, and your options for cashing in on your life insurance policy. 

What Is Cash Value in Insurance?

Cash value life insurance is when a portion of a permanent life insurance policy has an additional savings or investment feature. This only applies to permanent life insurance, as term life insurance does not include cash value. The policyholder may be able to borrow against this cash value portion or withdraw certain amounts. 

It’s essentially a two-in-one package. You’re paying for financial security for your family in the event of your death, and you’re also putting money into the cash value portion for saving or investment purposes. 

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

The amount of time it takes to build cash value on a life insurance policy will vary depending on the policy. According to most financial advisors, policyholders should let the cash value of their life insurance grow for about 10 to 15 years before attempting to access that cash. 

To better understand this, let’s compare it to a more familiar concept. When you purchase a house via a mortgage, the payments you make toward that mortgage will go toward paying off different things—the principal and the interest (and sometimes taxes and insurance, if that’s included in your payment). 

At the beginning of your mortgage term, a larger percentage of your payment will go toward interest rather than the principal. As you get closer to paying off your mortgage, you will owe less interest due to a lower principal amount, and a larger percentage of your payment will start going toward the principal instead. 

Cash value life insurance works in a similar manner. Generally, in the early years of your life insurance policy, a portion of your premiums will go to the insurance company to cover costs, commissions, and other fees. The rest will go toward your policy’s death benefit and the cash value portion. Depending on the policy, if a smaller portion of your premium goes toward the cash value at the start, you probably won’t see much of an accumulated cash value in those first few years. 

How Do I Find the Cash Value of My Life Insurance Policy?

The best way to calculate the cash value of your life insurance policy is by contacting your insurance company or agent. Depending on the insurance company, you might be able to find the cash value through an online web portal or phone app. The number will vary depending on certain factors like:

  • The type of life insurance policy you have
  • The insurance company you have your policy with
  • Size of your death benefit 
  • Current interest rates
  • State of the economy and the market (if your cash value is invested)
  • How long you have been paying premiums

What Happens When You Take Cash Value From Life Insurance?

The results of cashing in on the cash value of your life insurance will also vary depending on your policy and the manner in which you access these funds. Of note, you can only cash in on your life insurance while still alive

This may seem a bit counterintuitive, since life insurance is all about benefits after the policyholder’s death. You might initially think that, when you die, the cash value would be like a bonus on top of the death benefit for your loved ones to enjoy. Unfortunately, that’s not how cash value insurance works. If you don’t utilize the cash value before your death, that money goes back to the insurance company, and your loved ones will still only receive the death benefit. 

To use your cash value while still alive, you can:

  • Use the cash value to cover future premium payments 
  • Trade in your cash value for a higher death benefit
  • Make a withdrawal (this usually lowers the death benefit amount, but this might be helpful if you no longer need the full amount)
  • Take out a loan against your cash value, but any money that remains unpaid (including interest) will be deducted from the death benefit when you die
  • Use the cash value as another form of investment, which might be a good option if you’ve maxed out other contribution limits (like those for a 401(k) or IRA)
  • Fully surrender your policy to receive the cash value, although it may be reduced due to surrender fees and income taxes

There are pros and cons to each of these scenarios, and it’s best to speak with your insurance company and a financial advisor to determine the best route for your situation. 

Is There Another Way to Cash In on My Life Insurance Policy?

Yes! If you’re looking to get cash out of your life insurance policy, you do have one other route available—a life settlement. If you’re in a situation where you don’t really need your life insurance policy anymore or you no longer wish to pay the premiums, then a life settlement might be the perfect option for you. 

At Life Settlement Advisors, we specialize in unlocking the secret asset that is your life insurance policy. In a life settlement, a typical policyholder will receive more than the cash surrender value, making it an appealing option over surrendering the policy. 

Ready to explore the benefits of a life settlement? You can start by going through our simple life settlement qualification calculator. If you qualify, you can download and fill out our application to move forward. And if you prefer to talk with us first or still have some questions, please contact us! We strive to empower our clients through knowledge so that they can make the best life insurance decisions for themselves and their loved ones. 

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com 
1-888-849-0887

Leave a Reply