A Comprehensive Guide To Cash Value in Whole Life Plans
Shopping for life insurance plans can seem complicated at times. With terms that you probably have never seen before and the numerous riders and policy types, it often leaves many confused.
One of the many terms that often leave buyers confused is “cash value”. From what “cash value” actually means to why you should get it, we have it all covered.
Cash Value Explained
Cash value is essentially the investment component of life insurance policies. As a portion of your policy that earns interest and is tax-free, it is a sum of money available for your use for various purposes such as loans or to pay a policy.
A cash value life insurance policy typically offers two benefits in a single policy, cash value itself as well as a death benefit. Death benefit refers to the amount of money paid out to the policyholder’s beneficiary after they pass away.
While the cash value in the policy will allow policyholders to draw loans, it is usually not immediate. Typically, the cash value will only start to accrue after five years. Only once your cash value has begun to accrue, will the cash value be available for your use. However, every insurer is different so do check your policy wording for more details.
The cash value that has been accrued will be available to you during your lifetime only. As such, should you pass on, your beneficiaries will only receive the death benefit and the remaining cash value will be reverted to your insurer.
Which Life Insurance Policies Offer Cash Value?
While it is offered under life insurance, not all life insurance policies offer the cash value feature. To clear the confusion, we have included a list of the life insurance policies that offer the cash value feature below.
- Whole life insurance
- Variable Universal life insurance
- Indexed Universal life insurance
Whole Life Insurance
For the whole life insurance policy, policyholders will pay a fixed monthly premium and will only be able to access their cash value by taking up a loan against their policy. Furthermore, they will be entitled to a guaranteed death benefit. As for the cash value, it will accrue at a minimum guaranteed rate.
Variable and Indexed Universal Life Insurance
Compared to whole life insurance policies, universal life insurance offers greater flexibility. It allows you to change your death benefit and reduce your monthly premiums so long as your cash value account has sufficient value to cover the cost of your policy.
Moreover, policyholders can access their cash value through either partial withdrawals or taking up a loan. For indexed universal life insurance, your cash value will be tied to an index whereas variable universal life insurance policies are linked to accounts with investments of your choice.
How You Can Benefit From a Cash Value Policy
Here comes the most important question: How can you benefit from your cash value policy? From using it for loans to the tax-free benefits, we have it all covered below.
How You May Access Your Cash Value
In an emergency and you find yourself short of cash? Your cash value policy has got you covered! Whether you need cash for an emergency, to pay premiums, or essentially anything, you can withdraw from your cash value or take up a loan against it. We have listed three ways you can access your cash value below.
Withdraw From Your Cash Value
The most straightforward way is to simply withdraw money from your cash value policy. As mentioned above, this method is usually only available for universal life insurance policies.
The good thing about withdrawing from your cash value is that it will be tax-free. However, once the amount you are withdrawing exceeds the amount you have paid for the cash value portion in your policy, it will be taxed as income.
Do also note that drawing down from your cash value will reduce the death benefit paid to your beneficiaries when you pass on.
Take Up a Loan
As an alternative to withdrawing from your cash value, you may also take up loans against your policy. This method is available across the various types of life insurance policies offering cash value.
Available to you for emergencies, to cover your child’s education and almost everything, you can take out a loan and repay your insurer with interest to keep your death benefit. Depending on your insurer, the interest rate may be fixed or variable.
If you fail to repay the loan amount and pass on, the outstanding balance including interest will be deducted from the death benefit given to your beneficiaries.
Terminate Your Policy
The last way to access your cash value would be to terminate your policy. This entails walking away with the cash value without the death benefit and paying a cancellation fee imposed by the insurer. Your insurer will also deduct any unpaid premiums and outstanding loan amounts.
Tax-Free Benefits
A major perk of cash value is the tax-free benefits. Be it the loans that you take up against your policy death benefit payouts to your beneficiaries, they will all be free from taxes. What’s better is that your cash value will accrue on a tax-deferred basis as well. As such sums of money are generally large amounts, this makes such a perk all the more important.
Having said that, if you withdraw from your cash value or terminate your policy, you may be taxed on the amount of money that came from interest or investment gains.
Use It to Offset Your Premiums
Depending on your policy and the amount of money remaining in your cash value account, you may be able to use it to offset a portion of your premiums. This is a great option for those facing difficulties in paying their life insurance policy premiums. However, do check with your individual insurer on their policy regarding using your cash value to pay for premiums.
An Option for High-Income Earners
For the individuals who have managed to max out their retirement account contributions, you can consider getting a cash value policy! Providing you with an additional account for tax-free savings, cash value policies are a great option to help you maximise your savings.
What You Should Take Note of When Considering a Cash Value Policy
Having a cash value policy does offer a ton of benefits. However, it may not be suitable for everyone and it is imperative that you read the fine print of your individual policy.
High Premiums
A key barrier to getting a cash value policy is the high premiums required as compared to a regular life insurance policy. This is because the premium that you pay will go to three places, cash value, the cost of insuring you as well as the policy fees and charges. As such, cash value policies are typically recommended to high-income earners with sufficient cash to fully enjoy the benefits that a cash value policy has to offer without having outstanding loan amounts.
To illustrate the difference in price, we have included a table below comparing the annual premium for Tiq’s term (without cash value) and whole life (with cash value) insurance policies.
To calculate the term life insurance premium, we have assumed the following:
- 35-year-old male
- Non-smoker
- Sum insured: S$1,500,000
- Coverage term: 5 years
To calculate the whole life insurance premium, we have assumed the following:
- 35-year-old male
- Non-smoker
- Sum insured: S$1,500,000
- Coverage term: Until age 85
| Plan | Annual Premium |
|---|---|
| DIRECT-Etiqa Term Life Plan | S$709.56 |
| DIRECT-Etiqa Whole Life Plan | S$3,267.36 |
Long Waiting Time
Apart from the high premiums, policyholders are only able to enjoy the benefits of the cash value after accruing it over a number of years. Oftentimes, it could take years and decades even to effectively accrue a significant amount.
Evidently, getting a cash value policy requires you to play the waiting game. As such, it is recommended that you start as early as 35 years old to accumulate a substantial amount to use.
The Choice Is Yours
While it is a great safety net for your loved ones should something happen to you, can you afford the exorbitant premium? As the majority of insurers in Singapore charge an early termination fee, you may end up paying more than the amount you are enjoying from the cash value.
Apart from your financial standing, it is important to consider your family’s needs. If your loved ones rely heavily on you, perhaps having an additional savings account would be a good decision if you can afford it.
Ultimately, whether you choose to get a cash value life insurance policy boils down to your financial situation as well as your needs. While you decide if you should get a cash value policy, feel free to check out on_current="true" url="https://www.valuechampion.sg/best-cheap-life-insurance"our comprehensive review on life insurance policies in Singapore/link]!
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Boon Hun spent over five years in the content marketing space as the managing editor of Goody Feed creating interesting and relevant content for the social media generation. In 2022, he moved to the FinTech space while remaining true to his roots, intending to bring financial literacy to more people in Singapore. When not doing his work, he can be found watching people build homes on YouTube.