Whole life insurance offers policyholders coverage for their entire lives, provided that they stay on track with paying their premiums. While term life insurance offers individuals coverage for a set term, whole life insurance is designed to give you peace of mind knowing that your family will be protected for the rest of your life.
While knowing that your family is protected is priceless in and of itself, whole life insurance offers the additional benefit of a cash value component, a feature not available to term life insurance policyholders.
The cash value of your whole life insurance policy grows over time and accrues interest. When you make payments towards your premium, a portion of that money goes towards your overall cash value.
A whole life insurance policy that offers cash value can be an attractive option for those seeking coverage with a savings component, and the money is not taxed as it accumulates. As the cash value increases, it can be an extremely useful asset in your financial portfolio. You can borrow against your cash value for loans or withdraw funds to cover unexpected expenses.
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What is a Whole Life Insurance Cash Value Chart?
A whole life insurance cash value chart allows you to analyze how your cash value will grow over time. This visual representation allows you to determine which policy may be right for your needs and your long-term goals.
At a glance, a whole life insurance cash value chart might not feel like it’s following an exact formula. This is because your whole life insurance policy won’t grow following an exact formula from its beginning to end. Instead, during the earlier years of your whole life insurance policy, you may receive a lower cash value due to administration fees.
However, as your policy matures, your cash value tends to grow more significantly. This is a result of compound interest, but can also be explained by dividends. Your death benefit may also increase slightly as your policy matures.
The cash value charts of different whole life insurance policies may differ slightly due to variations between the terms of different policies and add-on insurance benefits that they may provide. However, there are three standard features that you can expect to see on most whole life insurance cash value charts.
- Yearly Premiums – This is the amount of money that you can expect to pay annually to keep the policy active.
- Cash Value – This is the amount accessible to the policyholder. It represents a portion of the premium, interest, and potentially dividends.
- Death Benefit – This is the amount your beneficiaries would receive in the event of your passing.
How Does Cash Value Build in Whole Life Insurance?
In whole life insurance, much of your life insurance goes towards your death benefit. However, a portion of this premium goes to the cash value. This is known as premium allocation and the specific amount of your premium allocated to the cash value can differ across policies.
Even when examining one policy, you’ll notice that premium allocation can change over time. When your whole term life insurance policy is in its infancy, much of your remaining premium after the death benefit will be allocated to fees and costs. The more your policy matures, the more money is allocated to your cash value.
Interest Accrual and Dividends
Aside from premium allocation, the two additional mechanisms by which your cash value grows are interest and dividends. Your provider will offer a minimum interest rate, but over time this rate will compound. This means that the interest accrued in one term is added to the existing cash value, which means that the interest calculated during the next term will be larger.
Much as companies pay a share of their profits to stockholders, insurers do the same for their policyholders. Dividends might not be included in every policy, so it’s important to discuss them with your insurance agent when you’re choosing a policy.
Policyholders may enjoy dividends in two ways:
- Add To Overall Cash Value: The dividends are added to the cash value, which means you’ll enjoy a higher return on your compounding interest.
- Received As Cash: Policyholders may receive their dividends as cash. While this won’t help them to grow the amount of cash value they accrue through interest, it can be a nice extra amount of cash to be enjoyed each year.
What Does a Sample Cash Value Chart Look Like?
There’s no one-size-fits-all cash value chart for every policyholder. Your whole life insurance cash value chart will vary depending on your policy, in addition to the amount of premiums you’re willing to contribute and the death benefit that suits your beneficiaries’ unique needs.
While specific numbers may vary, this is an example of what a cash value chart could look like.
| Policy Year | Age | Annual Premiums | Cash Value |
| 5 | 40 | $1,178 | $3,738 |
| 10 | 45 | $1,178 | $11,569 |
| 20 | 55 | $1,178 | $33,838 |
| 30 | 65 | $1,178 | $72,398 |
| 35 | 70 | $1,178 | $99,839 |
| 50 | 85 | $1,178 | $228,317 |
| 55 | 90 | $1,178 | $289,301 |
Notice in the early stages of the policy, the cash value is smaller. However, by the tenth year the cash value has more than tripled. As five-year blocks of time pass, the cash value begins to grow more rapidly and significantly. This acceleration reflects compounding interest and dividends added to the cash value instead of paid out directly to the policyholder.
Which Factors Affect Cash Value Growth?
Multiple factors can affect the growth of your cash value. Here are some of the most common factors that will affect the rate of growth and the amount accrued over time.
Policy Structure
Policies are structured differently to accommodate people’s different financial needs and goals. If your policy involves larger premium payments or includes dividends, you will likely enjoy a larger return on your policy’s cash value. Some policies allow you to invest your cash value into various investment opportunities. This means that you might not accrue as significant a cash value in the short-term, but may enjoy larger returns over time.
Premium Payments
Aside from how much you pay each year, the consistency of your payments can affect your whole term life insurance policy’s cash value. If payments need to be reduced due to financial hardship, it can negatively affect your policy’s cash value, as can payments that are missed entirely.
Interest Rates
While your insurer will offer a guaranteed minimum interest rate, that percentage can differ across different insurance providers and insurance products.
Dividends
Not all policies offer dividends. For those that do, they aid in accelerating the growth of your policy’s cash value if they are added to its amount. If they are paid out directly to the policy holder, your dividends will not help to grow your cash value.
Withdrawals
In the event that you need to withdraw money from your cash value, it will negatively affect your cash value’s growth. While your policy’s cash value might behave similarly to a savings account, it’s a good idea to not treat it like one. Instead, only plan to withdraw directly from your cash value in the event of an emergency.
What Are The Benefits of Whole Life Insurance Cash Value?
The cash value of your whole life insurance can offer a wide array of benefits to you and your loved ones, which is why it’s often a more attractive option than term life insurance. Here are some of the benefits it provides.
Tax-Deferred Growth
Since policyholders are not subject to taxes on any gains to their cash value as they accumulate, policyholders can enjoy a higher return compared to other financial tools that are subject to taxes. This is an especially important factor as the policy matures and the cash value rises.
It’s worth noting that any money you withdraw from your cash value account may be subject to taxes. However, if you leave the money untouched, it remains exempt.
Access To Policy Loans
Unlike term life insurance policies, whole life insurance policies offer policyholders access to policy loans. These are loans that are borrowed against the cash value, allowing policyholders access to funds relatively quickly and often without the need for a credit check.
Policy loans tend to offer borrowers relatively low interest rates, as the loan is secured. However, individuals should only take out policy loans if they’re confident in their ability to make the repayments. Failure to do so may result in the debt being deducted from the death benefit, which would reduce the money your family would receive in the event of your passing.
Emergency Funds
In the event of an emergency where you aren’t confident in your immediate financial future, a withdrawal from the cash value may be preferential to a policy loan. While this withdrawal will reduce your cash value, you won’t be subject to repayment as you would if you obtained a policy loan.
While no one plans to find themselves in a period of financial hardship, the cash value of your whole life insurance can give you the peace of mind that you have access to funds in the event of a rainy day.
Dividends
While not all whole life insurance policies offer dividends, those that do offer their policyholders an additional benefit. These dividends pay a share of the insurance company’s profits back to the people who make their company successful, the policyholders.
While these dividends can be used to grow the cash value, they can also be enjoyed as direct payments.
Retirement Income
As retirement draws near, your cash value can help to supplement your income. Traditional retirement accounts are a preferential way to support your lifestyle after you leave the working world. However, you can access the cash value of your whole life insurance in the event that you find yourself with an unexpected medical bill or in need of additional funds.
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What Are The Tax Implications of Cash Value Growth?
The cash value of a whole life insurance policy operates on what is known as a tax-deferred basis. This means that policyholders don’t pay taxes on the cash value as it accumulates, but rather only in some situations when the money is withdrawn.
Because policyholders aren’t taxed on these funds as they accumulate, it allows the cash value amount to grow faster.
However, there are two situations where your cash value is subject to taxes.
Withdrawals
In an ideal situation, you don’t want to withdraw money from the cash value of your life insurance. However, if you find yourself in a situation where you have to, you may be subject to taxes — or you might not.
In determining whether or not your cash value withdrawal is subject to taxes, you’ll have to determine something called your cost basis, which is the total amount of premiums that you’ve paid into your policy.
If the amount of your withdrawal is less than your cost basis, you won’t have to pay taxes on it. However, if the withdrawal exceeds your cost basis, the excess amount beyond what you’ve paid into premiums is treated as taxable income. If you find yourself in a situation where you need emergency funds, it’s ideal that you aim to keep your withdrawal amount under your cost basis.
Policy Loans
Typically, policy loans taken against a whole life insurance policy aren’t taxable, but only if the loan meets certain criteria. First, the policy must remain active. Should the policy lapse, the loan is treated like any other and may be subject to taxes.
This tax burden could be significant in the event that the balance of your loan is particularly high. This is why a withdrawal is typically preferable to a policy loan during times of unexpected financial hardship. If you suspect that there’s a chance that you could fall behind in your premium payments, you don’t want to be stuck with an unexpected tax burden should your policy lapse.
What Are Strategies For Maximizing My Cash Value?
One of the benefits of the cash value of your whole life insurance policy is that it’s a way to accumulate wealth that essentially runs in the background. There isn’t much you need to actively do to ensure that this investment benefits you the way in which it’s intended to.
However, there are some strategies that you can employ if you want to maximize your cash value. Here are some tips for those who want to accelerate the growth of their cash value.
Regular Premium Payments
This is essentially the most straightforward way to ensure that you maximize the growth of your cash value. Not only do regular premium payments ensure that your policy remains active, but they ensure that you’re on track to meet your financial goals when it comes to your policy’s cash value.
In the event of a missed payment, not only will your accumulated interest suffer, but you may be subject to penalties or fees. If you believe that you may be entering a period of financial hardship, it’s best to reach out and speak to your insurer.
Opt For High-Cash-Value Riders
Beyond the basic strategies for maximizing cash value, such as paying premiums on time and reinvesting dividends, some insurers may offer additional ways to supercharge the cash value of your whole life insurance policy.
One example of this is the Paid-Up Additions (PUA) rider, which enables policyholders not to reinvest the dividends back into their existing policy, but to purchase additional quantities of life insurance which will increase the value of your policy overall. These PUAs are fully paid for, which means they don’t require additional premiums, but increase both your total death benefits and cash value.
While no one wants to think about what would happen if they become ill or infirm, there are riders that will protect both your death benefits and your cash value in the event of the unexpected. The Waiver of Premium rider allows policyholders to stop paying premiums but maintain their policy in the event they become disabled. The Accelerated Benefit rider allows policyholders to access their death benefits early in the event they are subject to unexpected medical expenses.
Reinvest Dividends
While sometimes the option is there to reinvest your dividends directly into the cash value, your policy may allow you to also put that money into other investment opportunities. If you aren’t sure how to get the maximum return on your dividends, talk to your agent about which options may help you achieve your long-term financial goals.
Avoid Withdrawals and Use Loans Cautiously
The cash value of your whole life insurance offers you the peace of mind of knowing that you have access to emergency funds if you need them. However, it’s ideal to avoid withdrawals if you don’t absolutely need them. The money reduces the overall cash value, which in turn decelerates its growth.
When it comes to policy loans, the advice is a bit less straightforward. If you repay the loan in full and on time, it won’t negatively affect your cash value. However, in the event of a missed or late payment, it can affect the value of your policy and an unpaid balance may be taken from your death benefit.
While a policy loan may be a useful financial tool for those confident in their ability to repay it in full, avoiding these loans ensures that your cash value and death benefits reach their full potential value.
When Should I Use a Cash Value Chart for Decision-Making?
A sample cash value chart gives you an idea of what you might expect from your whole life insurance policy. However, as you narrow your policy options, you’ll be able to access a cash value chart that accurately reflects your minimum interest rate, expected premiums, and whether or not you’ll benefit from dividends.
Visualizing the projected growth of both your cash value and death benefits allows you to get an understanding of how whole life insurance will benefit not only your long-term financial goals, but the ensured financial protection to be enjoyed by your loved ones.
A cash value chart isn’t just useful for those at the beginning of their whole life insurance journey, however. It can also be revisited as a tool as you near retirement . A cash value chart allows you to see how much cash value you’ll have at the time of your retirement.
Is Whole Life Insurance Right For You?
When people first think about life insurance, they often opt for whole life insurance instead of term life insurance due to the peace of mind offered by lifelong coverage Indeed, it’s reassuring to know that your policy will protect your beneficiaries for the rest of your life.
However, that peace of mind isn’t the only benefit that whole life insurance has to offer. Indeed, the cash value of your policy can be a financial asset, especially if you engage in best practices for maximizing its growth.
When you understand what to do and what not to do in order to accelerate the growth of your cash value, it’s easy to see why whole life insurance can be an invaluable component of long-term financial planning.
While understanding how the cash value of your whole life insurance helps you to maximize the financial future for you and your family, deciding on a policy can be complicated. The best way to determine which policy is right for you is by consulting with a Fidelity Life insurance agent .
Our team of licensed insurance agent scan go over your projected finances and financial goals. We can determine which policy options are best suited for you, in addition to answering any questions that you might have about life insurance. Reach out to a Fidelity Life agent today at 1-866-912-7775 to find the policy that’s right for you and your family.
At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible. We encourage you to speak with your insurance representative if you have additional questions and make sure you read your policy contract to fully understand your coverage.
Article Sources:
- Investopedia. How Cash Value Builds in a Life Insurance Policy
