Cash Value/ Dividend
What is Cash Value? Is it same as the premiums paid?
“Cash value” often appears in life insurance policies that have a savings component, and it is not equal to the premiums paid. To calculate the cash value of a policy, you need to subtract the cost of insurance and operating expenses (such as commissions and management fees) from the premiums paid each period, and then add the interest generated by the remaining premiums.
What kinds of insurance have Cash Value?
Both whole life insurance and savings insurance can accumulate cash value.
In addition to investment-linked policies, some insurance companies have also introduced many medical and critical illness insurance products with savings components in recent years, which also have cash value. As policyholders can only receive the cash value upon surrender or maturity of the policy, it is also known as the “surrender value”.
Differences between Guaranteed and Non-guaranteed Cash Value
Accumulated cash value is often divided into 2 parts, which are guaranteed and non-guaranteed cash value.
- 😍 Guaranteed Cash Value: The amount that the insurance company is required to pay back upon surrender of the policy
- 🤔 Non-guaranteed Cash Value: The expected amount of cash value that may be paid out, but the non-guaranteed portion is not guaranteed to be paid out, especially during major financial crises or long periods of low interest rates. Insurance companies have the discretion to reduce or even not distribute the non-guaranteed portion of the cash value
When will Cash Value be distributed?
To obtain the cash value of a life insurance policy, one can choose to surrender the policy. The surrender value is calculated based on the accumulated cash value of the policy, but if the policyholder has taken out a policy loan or used automatic premium loans to pay premiums, the insurance company will deduct the outstanding balance and interest from the cash value when surrendering the policy.
The so-called “Automatic Premium Loan” means that if the policyholder does not pay the premium and the cash value is sufficient to pay the premium, the insurance company will advance the accumulated cash value in the form of a policy loan to pay the premium, thereby keeping the policy in force and providing continuous protection to the policyholder.
In addition, it is important to note that the cash value of a policy can have an impact on policy loans and dividends. In policies with policy loan features, the insurance company allows the policyholder to borrow a certain percentage of the accumulated cash value and pay interest to the insurance company. The maximum loan amount varies among insurance companies, typically ranging from 70% to 90% of the cash value of the policy, and policy loans must be repaid within a certain time frame.
In participating policies, the annual dividend paid to the policyholder is calculated based on the cash value of the policy. Therefore, if the policyholder has withdrawn the cash value of the policy in any way, it may affect the final return. Policyholders may have disputes with the insurance company over dividend issues.
Does Cash Value grow over time?
In theory, the accumulated cash value of a life insurance policy will increase over time as it rolls over, provided that the policyholder does not withdraw any cash during the process.
As mentioned earlier, the cash value of a policy is calculated by deducting all relevant expenses from the premiums paid each period and adding the interest earned on the remaining value. Generally, the remaining value will continue to accumulate and increase, so the interest earned each period is also likely to increase (assuming the interest rate remains unchanged). With the compounding effect, the accumulated cash value can become larger and larger over time.
Does Cash Value make an insurance a good buy?
The cash value of an insurance policy is derived from the premiums paid by the policyholder, as well as the investment dividends earned by the insurance company, the actual return on investment is thus difficult to accurately budget. In addition, policyholders have to pay higher premiums in order to obtain cash value. Therefore, whether an insurance policy with cash value is a good buy or not really depends on individual circumstances.
When choosing between life insurance policy with a savings components and term life insurance, Instead of relying solely on “cash value”, it is better to make the decision based on one’s own needs, investment goals and investment preferences:
Protection Needs
A family with 4 children requires greater protection than a family of 2 without children, as if the breadwinner unfortunately passes away due to illness or accident, the family will need the life insurance payout to support their living expenses, and the family with four children has naturally higher expenses.
If the former purchases a whole life savings insurance policy, the premiums may be very expensive💰💰💰. Taking into account the expenses, purchasing a term life insurance policy may be a better option.
VS
Investment Goals
Term life insurance cannot be paid off, meaning that the policyholder needs to keep paying premiums to maintain coverage. The advantage of term life insurance is that the monthly/yearly premiums are cheaper, but the downside is that the policyholder will still need to pay premiums even when they are older (which may be a burden after retirement). On the other hand, the advantage of a savings life insurance policy is that the policyholder only needs to pay premiums for 20-30 years to obtain lifelong coverage, but the monthly/yearly premiums are usually more expensive.
If you are purchasing life insurance to ensure your family can maintain their current standard of living in the event of your unfortunate death, you may only need coverage until age 65, as by then your children will have grown up and can support themselves, and even the family. Even if you pass away, your family will not need to rely on your life insurance payout. Therefore, you don’t need to worry about paying premiums after retirement, given that you can simply let the policy lapse.
However, if you are purchasing life insurance to pass on your assets and double your personal wealth to leave to your children, term life insurance may not be suitable for you. For example, if you purchased a term life insurance policy with coverage until age 80, but passed away at age 81, your children wouldn’t receive any of the payout. Moreover, paying premiums for nearly 20 years after retirement would be a significant burden. In such cases, universal life insurance or whole life insurance policy combined with premium financing may be a better choice.
Investment Preferences
The return on investment of a savings life insurance is more stable compared to other investments, making it a good option for those who are not good at investing and prefer to keep their money in the bank. However, if you have experience in investing, purchasing a term life insurance policy and investing the saved premiums into higher-return investments may be a better option.
Back to where we first started – is a policy with cash value always better than one without? It’s difficult to make a direct comparison. When purchasing life insurance, it’s important to consider your own needs and situation.
