Cash value is a central component of universal life insurance and plays a critical role in determining whether the policy remains in force over time. Unlike whole life insurance, where cash value growth is largely guaranteed, universal life insurance cash value is more variable and depends on policy performance and funding decisions.
What Cash Value Represents
In a universal life insurance policy, cash value is the account balance that remains after monthly policy charges are deducted from premiums. This balance:
- Accumulates on a tax-deferred basis
- Is used to cover ongoing insurance costs
- Supports the policy’s long-term viability
Cash value acts as both a savings element and a funding mechanism.
How Cash Value Is Built
Cash value is built through:
- Premium payments in excess of monthly charges
- Interest or returns credited to the policy
The amount of cash value accumulated depends on:
- How much premium is paid
- Policy fees and insurance charges
- Interest rates or investment performance
Paying only the minimum premium often results in slow or negligible cash value growth.
Interest Crediting Methods
Universal life insurance cash value may grow through:
- Declared interest rates set by the insurer
- Indexed crediting tied to market indexes
- Investment subaccounts in variable policies
Each method has different risk and return characteristics.
Impact of Policy Charges
Monthly deductions include:
- Cost of insurance charges
- Administrative expenses
- Rider costs
These charges increase over time as the insured ages. If charges exceed premiums and credited growth, cash value declines.
Using Cash Value to Pay Policy Costs
If premiums are reduced or skipped, cash value may be used to cover monthly deductions. While this keeps the policy active temporarily, it reduces future growth potential and increases lapse risk.
Accessing Cash Value
Policyholders can access cash value through:
- Loans
- Withdrawals
Both methods affect cash value and may impact policy longevity if not managed properly.
Cash Value and Policy Lapse Risk
Universal life insurance relies heavily on cash value. When cash value is depleted:
- Monthly charges cannot be covered
- The policy may lapse
- Coverage ends without value
Active monitoring is essential to prevent unintended lapse.
Comparison to Whole Life Cash Value
Whole life cash value:
- Grows predictably
- Includes guarantees
- Is less sensitive to funding changes
Universal life cash value:
- Is performance-dependent
- Requires ongoing management
- Offers greater flexibility with higher risk
Key Takeaways
Cash value in universal life insurance is dynamic and directly tied to policy funding and performance. While it provides flexibility and potential growth, it also introduces risk that requires active oversight to maintain long-term coverage.
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