Difference between Death Benefits and Cash Values
When you have life insurance, you may have your family asking you what is the difference between death benefits and cash values? The easy way to answer this will be to set them down and explain the difference carefully. Death benefits only come into play when you have a term life insurance or a whole life insurance policy that has run its course and the policy holder has passed away. This is the time when a death certificate will be sent into the life insurance provider, and once verified, will result in a death benefits checks being sent out to the beneficiaries.
There is no way to change this death benefit amount because it will have been set in stone with the original purchase of the policy. However, there may be certain conditions that apply such as being able to share in the profits of the death benefits depending on the type of life insurance plan that has been purchased. Other plans do not allow for this sharing of profits with the extra amount if any will remain with the life insurance provider. This is true even if your final expenses do not cost the full amount of coverage that was originally purchased, so you should consider dropping some coverage for lower costs. The condition that allows family members or beneficiaries to share into the profits of the death benefits may cost slightly more each month.
Cash Value Definition
Cash values build with whole life insurance policies only. This is where you purchase a life insurance plan that covers you as long as you're alive. As time goes on and you make your payments consistently, the cash value of the policy grows because a portion of each month's premium is set aside into this fund. This portion will be predetermined by the broker and the policy holder when they originally sign a purchase contract. From that point, there is no change in the portion amount other than depending on market conditions and the type of whole life policy that it's categorized as. However, the basic process is the same in that it does accrue value each month consistently.
Cash values can be cashed out at one point if the policy holder decides to do this. This means they are surrendering the life insurance policy voluntarily in exchange for the amount of funds that has grown over the years. Reasons why they would do this include retirement, their children's education or marriage, or any other large purchase that they have been using this life insurance policy as a savings account for. In fact, this is one of the main attractions of a whole life insurance policy is that it works like a forced savings account for someone who can't really set aside money on their own. These are different than death benefits because they can be cashed out any time after the five-year anniversary of the policy purchase date.
You can also use some online sources to learn the difference between death benefits and cash values if you want some better examples. On the web you can find various explanations and definitions that are geared toward both the beginner and expert investor. This will give you information to share with your family so they are fully aware of the options and how they apply to your specific purchase. It also works as an educational tool so they can read through the various articles and term phrases that are online in order to help clients better understand the service of both death benefits and cash values alike.