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Life insurance is for many people one of the most important protections to ensure the financial security of their loved ones in the event of death. However, depending on the chosen contract, several options are available and it is not always easy to see clearly.

Among these options that can be included in your contract is the cash value. But what exactly is it? In what contexts can it be used? It is on these aspects, and more, that this article will focus.

What is a Cash Value?

To define it simply, the cash value is the amount you can receive when you end your life insurance, based on the money invested. However, some contracts allow the insured, after some time, to withdraw part of this value without putting an end to the insurance.

Since the redemption value can in some cases represent a sum of several thousand dollars, it can be interesting to take advantage of it. Note that the amount that can be collected before the end of the insurance policy is usually specified in advance of the contract.

The cash value that you will accumulate over the years can be fixed in advance by your insurer. It may vary depending on the number of years of validity of the insurance and the premium you pay. It is often nil during the first years.

In most cases, the cash value is an option associated with permanent life insurance.

Is the cash value guaranteed?

Depending on the life insurance you purchase, the cash value may or may not be guaranteed by your insurer. You will therefore need to check your contract in detail to find out what applies to your situation. In some cases, only a portion of the cash value may be guaranteed.

How does cash value life insurance work?

The surrender value and its operation are established when the contract is taken out. This allows the insurer and the insured to agree on the amount and the associated conditions, even before the entry into force of the insurance policy.

In the majority of cases, the surrender value is calculated according to the capital invested in the insurance. It will therefore vary from one situation to another, depending on the specificities of each.

Once the contract has been taken out and the conditions allowing its use have been fulfilled, the insured will have two options:

  • terminate his insurance contract to collect the full surrender value;
  • make a partial surrender of the amount to maintain his insurance (borrow against the surrender value).

Full Cash Value Withdrawal

Withdrawing the full cash value of your life insurance also means terminating your policy. All sums accumulated over the years will be withdrawn and your insurance policy will be canceled.

If you are considering such an option, consider this first:

  • You will no longer be insured in the event of death unless you take out a new insurance policy afterward.
  • Money collected from the cash value will be taxable (with some exceptions).

Partial surrender of life insurance

Making a partial surrender of your life insurance allows you to use part of the surrender value and not the whole sum. This involves borrowing a certain amount from your insurance policy.

Depending on your contract, your insurer may allow you to borrow up to 90% of the amount accumulated. The money withdrawn will however be subject to interest, set by the insurer, and this will generally have to be paid upon receipt of your annual statement.

Keep in mind that the larger the amount is withdrawn and the longer your loan will be, the higher the interest charges will be. The annual cost that you will have to grant to your life insurance will therefore be more imposing.


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