How Cash Value Grows

When you pay premiums on a whole life policy, the policy provides a death benefit while also building cash value according to the terms of the contract. Over time, that cash value can become an important part of the policy’s overall value.

A properly designed whole life policy can provide guaranteed cash value growth according to a schedule established when the policy is issued, provided the policy remains in force and required premiums are paid. This guaranteed growth is not tied to stock market performance. Cash value generally grows on a tax-deferred basis under current federal tax law.

Many whole life policies are issued by mutual insurance companies, which are owned by their policyholders. Depending on the company and policy, eligible policyholders may receive dividends if the company declares them. Dividends are not guaranteed and are not included in the policy’s guaranteed values.

Dividends may be used in several ways, including purchasing paid-up additions (PUAs). PUAs are additional amounts of paid-up insurance that can increase both the policy’s cash value and death benefit, subject to the policy’s terms and applicable limits. Additional premium may also be used to purchase paid-up additions when the policy allows.

Cash value typically builds gradually in the early years and can become more substantial as the policy matures. If the policy permits, you may access cash through a policy loan, providing a source of capital during your lifetime. The policy can continue in force while a loan is outstanding, provided sufficient value remains and required premiums and other policy obligations are met.

Policy loans accrue interest, and unpaid loan balances can reduce the policy’s cash value and death benefit. If a policy lapses or is surrendered with a loan outstanding, there can also be tax consequences.

The goal is not simply to accumulate cash value. It is to build a properly structured life insurance policy that provides protection today while creating additional financial flexibility for the future.

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