What is the Cash Value of Whole Life Insurance?

The cash value of whole life insurance is the contractual dollar amount the insurance company will exchange with a policy owner in the event the insurance policy is cancelled.  This same cash value is the basis by which the insurance company will loan to the policy owner. The loan is collateralized by the cash value. The insurance company will not lend the policy owner more than the total cash value of the policy owner’s life insurance policy. The cash value of whole life insurance is also accessible by the policy owner through a partial surrender, which is a physical withdrawal of the cash value.

To better understand the cash value of whole life insurance, it is important to understand what cash value is, how it grows, and how it can be utilized.

Cash Value Growth

Whole life insurance is a unilateral contract between the insurance company and the policy owner. In this contract there are guarantees and benefits to the policy holder(s), one of which is guaranteed cash value growth. Cash value grows tax free. When the cash value is withdrawn for income or otherwise, it is also tax free until the withdrawals exceed the basis of the policy. The basis is the amount of premiums that have been paid over time by the policy owner. At this point the withdrawals are taxed at ordinary income tax rates.

The cash value of whole life insurance also grows if the policy owner elects to have his dividends buy a paid-up additions rider. Dividends are declared every year by the mutual insurance company who issued the policy. In the subsequent year, they are divided amongst policy owners on the anniversary date of their policy. The anniversary date is the month and day the policy was originated. Although dividends are not guaranteed, mutual insurance companies have a long track record of paying dividends. Some companies have paid for over 100 years.

Loans Against Cash Value

Through the policy loan provision, a policy holder can access the value of his cash value without incurring taxes. This is because policy loans are treated as debt, which is not a taxable distribution. A similar financial transaction is a real estate cash out refinance. No taxes are paid on the refinance proceeds. Although policy loans are not required to be paid back, it is recommended. The insurance company charges interest on the outstanding policy loan but does not require payments to be made. However, an outstanding policy loan will reduce the overall available cash value and if death were to occur with an outstanding policy loan, the loan would be paid back via the death benefit proceeds.

Whole life insurance is a unique financial product because of the guarantees, tax benefits, and historical positive performance. For more information on the cash value of whole life insurance and how it can play a part in your financial situation, schedule a free consultation with a Paradigm Life Wealth Strategist. We’re here to answer all your questions, no strings attached.

To learn more about Infinite Banking and the guaranteed benefits found within whole life insurance download our free article.

Justin Atkinson

Justin Atkinson (14 Posts)

Justin’s entrepreneurial spirit began as a young boy. Justin’s father learned about a construction business at a young age and built that business from the ground up into a successful business that is still operational today (nearly 50 years later). This had a huge impact on Justin that instilled the basic life principles of hard work, ingenuity, integrity and commitment. Justin learned by his father’s example that these 4 principles are essential to anything he does in life. These 4 principles have been instrumental in creating success in Justin’s own Construction Company, teaching self-motivational seminars and a Financial Services practice for nearly 23 years. Justin also realized that the entrepreneurial spirit is alive in each and every individual and you don’t have to own a company to be an entrepreneur. By educating his clients on the principles of the Infinite Banking Concept, Justin’s clients realize that they have the power to create the flexibility, passion and peace-of-mind that comes with financial stability and freedom. It’s really that easy and Justin is masterful in teaching and educating his clients to see how that can be accomplished regardless of their situation or circumstances of life. Justin lives the very Infinite Banking Principles he teaches and has learned that experience is the best teacher in life. Justin is married to his best friend Hollie - for nearly 25 years. They have three children: Emily, Jake and Ben. Emily is graduated from Westminster College in Salt Lake City and played 4 years of college volleyball. She graduated with a Bachelor of Arts in Elementary Education. Jake is attending Utah Valley University with an athletic scholarship playing baseball and Ben will be following in his brother’s footsteps. Needless to say, Justin and Hollie enjoy supporting their children in their school and sport activities and have traveled the world doing so. They enjoy hiking, vacationing to the beach and spending time together as a family. The Infinite Banking Concept is a vital part of their family and each child is actively implementing these concepts into their lives.