If you’re considering purchasing life insurance or are exploring ways to maximize the benefits of your policy, you’re likely looking to answer the question, how does life insurance build cash value?
A policy’s ability to accumulate cash value over the years can provide a significant benefit to a policyholder, as he or she may be able to tap into these funds in case of emergency or can use them to pass along to heirs. While many nuances that determine a policy’s cash value, there are some standard protocols that most insurance companies follow:
- Term vs. Permanent:
One of the first things you have to determine when looking to answer how does life insurance build cash value is what type of policy do you have? For instance, term life insurance is only applicable for a certain period of time and does not acquire cash value while permanent life insurance does. If you think you may want to take advantage of the cash-value option, you’ll need to explore the best permanent life insurance policy for you.
- Type of Policy:
There are a number of different permanent life insurance policies that build cash value, all in varying ways. Whole life policies lock in a rate of growth, which the company and policyholder agree to and which doesn’t change, while universal policies rely on current interest rates to determine the growth. Another option is variable, in which the funds are invested and cash value grows according to the success of the investments.
- Premium Payments:
Cash value starts to build through the policy holder’s premium payments. Typically, insurance companies divert the payments into three distinct pools: A piece funds the policy holder’s death benefit, another goes toward the company itself and the final is contributed to the cash value. Usually, the company will put a larger portion of the premium payment toward the cash value in the early years of the person’s policy, with growth slowing over time.
Deciding which type of policy is right for you depends on a lot of factors, including budget, health, and lifestyle, which is why it’s important to do your research, consult with experts and make the right decision for your individual circumstances.
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