What Happens to the Cash Value When You Die?
In all life insurance plans, the actual cash value of the policy is not owned by the policy holder. These insurance carriers own and consider the cash value of its policy holders as their own corporate asset. This amount will then be used to pay death benefits to be forwarded to the family of the insured individual. Under the “non-forfeiture” clause, it is stated that upon the cancellation of an insurance policy or plan by the insured person, the insurance company will be obliged to return the cash value to the owner of the policy. Hence, the insurance carriers no longer have an obligation to forward payouts to the beneficiaries of the former policy holder.
In layman’s terms, the cash value of the insurance policy dies together with the insured. It will cease to exist as soon as the owner of the plan expires. The main role of an insurance policy is to be able to give a lump sum to the beneficiaries when the insured person dies. This is the nature of an insurance payout or death benefit. It is the primary function an insurance policy.
On the other hand, the cash value has a completely different nature. It is the policy’s monetary worth to the owner at any point in time. Cash value is also referred to as “cash surrender value”. The reason being is that, this will be the exact amount that the policy holder will receive if, for some reason, the plan lapses or gets canceled.
Note that for term life policies; there isn’t any cash value involved. Should term life insurance plans become canceled, the former policy holder shall not get any proceeds in the form of death benefits or cash value. The individual gets nothing. For people with canceled universal or whole life plans, they might be able to receive a portion of the cash that they paid for in premiums. This sum, typically, increases in value over time.
The explanation for why the cash value expires upon death of the insured party is due to the fact that only cash value or a death benefit may be claimed. There is no option, whether in a universal or whole life policy, to receive both types of amounts. To make it simpler, when the insured dies, a death benefit will be received by that individual’s beneficiaries. When the insured person or policy holder decides to end the insurance coverage while he or she is still alive, a check will be handed to that person. In this scenario, the beneficiaries will no longer have a share of the proceeds upon death of the insured person.
Premiums for whole life policies are expensive because of the cash value. Later on, this amount will help in the premium payments, so for the policy holder, the rate stays constant. There will be no increase no matter how long the coverage will last. Think of it as investing in advance payment for premiums so when you retire, and can no longer afford to earn as much, insurance coverage can still be maintained.