The cash value in a universal life insurance policy typically does not get passed on to your beneficiaries after you die. Instead, at the policyholder's death, the beneficiaries usually receive the policy's death benefit, which is a predetermined sum.
Understanding Universal Life Policy Components at Death
Universal life insurance is a type of permanent life insurance that includes both a death benefit component and a cash value component. While the death benefit is designed to provide financial protection to your beneficiaries after you pass away, the cash value serves a different purpose during your lifetime.
- Death Benefit: This is the primary payout to your designated beneficiaries upon your death. It's the amount of coverage you purchased, minus any outstanding loans or unpaid premiums, and is generally separate from the cash value accumulated within the policy.
- Cash Value: Over time, a portion of the premiums paid into a universal life policy accumulates as cash value, which grows on a tax-deferred basis. This cash value is primarily a living benefit, accessible to the policyholder during their lifetime.
When the insured dies, the insurance company pays out the death benefit to the beneficiaries. The accumulated cash value is typically absorbed by the insurer, as it is factored into the calculation of the death benefit or considered a separate fund for the policyholder's use before death, not an additional payout at death.
Key Distinction: Cash Value vs. Death Benefit
To clarify what happens, consider the distinct roles of these two components:
| Feature | Cash Value | Death Benefit |
|---|---|---|
| Purpose | Personal financial resource for policyholder | Financial support for beneficiaries upon death |
| Accessibility | Accessible by the policyholder during their lifetime | Paid out to beneficiaries upon the policyholder's death |
| At Policyholder's Death | Typically absorbed by the insurer (not a separate payout to beneficiaries) | Paid to designated beneficiaries as the policy's face amount |
Utilizing Your Cash Value During Life
Because the cash value is generally not passed on to beneficiaries, policyholders often opt to access it during their lifetime. This can be a strategic financial move, offering various opportunities:
- Supplementing Retirement Income: The cash value can be a source of funds during retirement, providing financial flexibility.
- Funding Major Expenses: You could use the cash value to pay for significant costs, such as a house remodel, a child's or grandchild's college tuition, or other large personal expenses.
- Paying Premiums: In some cases, the cash value can be used to cover future policy premiums, potentially making the policy self-sustaining.
- Policy Loans or Withdrawals: You can typically access the cash value through loans or withdrawals. Loans must be repaid with interest, or they will reduce the death benefit. Withdrawals reduce both the cash value and the death benefit.
It's crucial to understand your specific policy's terms regarding how cash value impacts the death benefit and what options are available for accessing it while you are alive.
For more detailed information on universal life insurance and its components, you can refer to reputable financial resources such as Investopedia or NerdWallet.
