Can you explain the meaning of cash value build-up?
UPDATED: Oct 14, 2013
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Asked October 14, 2013
One very important feature of a permanent life insurance policy is the cash value it accumulates over time. Cash value is available in most types of permanent life insurance, including whole life, universal life, and variable, along with their variations. Term life policies do not accumulate cash value because, unlike a permanent life policy, term life policies are betting on you outliving the contract.
When you make a premium payment, a portion of the premium is put into your accumulated cash value. The cash value in your account also earns interest. Over time, the combined accumulated cash value and earned interest can grow into a substantial amount.
You have several options of how to handle the cash value in your policy. First, you can choose to increase the cash value by what is known as a cash value build-up. As the name implies, this is simply a way of investing more into the cash value of your policy. If you intend to have the policy pay its own premiums in future years, cash value build-up is a good way to make it happen sooner.
In addition to using the cash value of your policy to pay the policy premiums, you can also borrow against it. Since this is tantamount to making a loan to yourself, there are no credit checks or collateral required. You still have to pay the loan back, and interest is charged against the outstanding loan amount, but the loan is tax-deferred. If you pass away before the loan is repaid, the balance of the loan is deducted from the cash value before the policy is settled. The face value of the policy cannot be lower than the amount purchased, but it can be higher if there is a cash value in the account after you die.
Answered October 14, 2013 by Anonymous