What Does the Term Cash Value Mean?
The many types of whole life insurance policies have a unique feature and that is that they gain cash value throughout the life of the policy. As long as you are paying a premium, a portion of that premium is invested into investments that are the choosing of the insurance company. Although you don't get to choose doesn't mean that the investments are not sound ones that will help you to gain cash value on your policy.
The cash value feature is one of the main reasons individuals choose permanent life insurance above temporary. There are a number of allowances a person receives that they wouldn't receive otherwise. Plus, the cash value supplements the death benefit in the end.
When you have a permanent life insurance policy that gains cash value, you can borrow against it. Granted it does take approximately 10 years to gain the cash value that you need, you will eventually have the ability to borrow the cash when you are in need of money. However, you do pay it back when you can.
In a way, you are acting as your own bank because you are borrowing your own money. However, just like a bank, you still have to pay back what you borrow with interest. You can borrow as many times as you need to from your policy, whether you need the money for vacation, for a down payment, or whether you need it for leverage on something else. Whole life insurance policies can be used as collateral on secured loans, as long as there is enough cash value.
When used as collateral, a lien is placed against the policy. If you were to default on the loan that the policy is being used as collateral for, then your policy would be taken possession of in order to pay back the creditor's loss on the loan.
So even if you don't have any assets, you can use your whole or universal life insurance policy to satisfy a debt if you needed to. You do, however, want to make sure you don't lose the policy because you want to gain cash value as long as possible. You want it to accumulate until your death so that your family can benefit from it.
Another way that you can use your cash value is to actually pay your premium. If you find that you cannot make a payment, you can call upon your cash value to do it for you. That way you don't miss your payment and cause your policy to lapse. So during the hard times you actually have a lot of help.
Types of Permanent Coverage
There are two types of permanent coverage: Whole life insurance and universal life insurance. Both gain cash value. However, universal life insurance can have a premium that varies. It is based upon market performance. This is so you can offset any losses that your cash value would experience. In other words, you get the most out of your cash value in this way. This does mean that the premium could be higher at times than whole life or it could be lower at times.
So as you can see, you are given a number of freedoms and flexibility with the cash value that is a very important part of your permanent insurance policy. If you would decide that you would want to cancel your policy, this is considered "cashing out" and it enables you to receive all of the cash value within the policy. This is done without you "borrowing" and having to pay back the amount with interest.