What is Cash Value in Whole Life Insurance? All You Need to Know

When you buy an insurance policy, you may feel that it only offers benefits only in case of the untimely demise of the policyholder. However, some life insurance plans also offer benefits while you are alive. Understanding the cash value in whole life insurance can help you choose the right plan.  

The cash value is a savings component of whole life insurance policies. This is one of the benefits of the long-term policy that grows over time as you pay your premiums and earn interest. Accessing cash value through loans or withdrawals makes it a versatile financial asset.

A part of the premium you pay goes toward the cash value account, and the insurance company invests that fund. Here are some of the benefits of cash value in whole life insurance: 

• Over the long term, whole life insurance helps build a corpus through the accumulation of cash value, though this growth is typically slow in the early years

• Premiums paid toward whole life insurance may be eligible for tax benefits under Section 80C, subject to prevailing limits and conditions

• You can take a loan against the cash value, usually at a favourable interest rate, but any unpaid loan amount, including interest, reduces the death benefit

However, it is important to know that the growing cash value over time does not have a fixed rate. It can be a guaranteed interest rate, as in the case of whole life insurance, or performance-based, as in the case of universal life insurance.

You can use your cash value to fund education, emergencies, or retirement. However, know that the premiums are generally higher for such insurance plans. You should also consider the duration of the policy since the longer you're paying the premium, the higher your cash value amount will be.

Considering the policy’s interest rate is as important. Additionally, it may reduce your death benefit, so plan wisely. So, carefully review all the factors, read the fine print and assess the returns before making a decision.

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