First Federal Bank Blog

A life insurance policy is critical for protecting your loved ones after your death, but you can also leverage it while you’re alive. That’s because policies offer two distinct benefits: cash value and death benefit. Understanding the differences between the two can help you pick the best policy and take better advantage of it.
 
What is cash value?
 
As with other policies, you pay monthly premiums on your life insurance. This gives your policy something known as cash value. According to Investopedia contributor Melissa Horton, cash value is any savings a policy accrues from premiums. When you make your life insurance payment, funds left after the monthly cost and carrier fees are paid go into an account.
 
The cash value of your insurance policy grows through tax-deferred contributions and interest, and you can eventually accrue enough value it may become a helpful tool during your lifetime. Experian's Karen Axelton notes you may be able to withdraw money as if it were any savings account or take out a loan as if it were a line of credit. You can also use the value to pay your monthly premiums and keep the policy current.
 
Another way to access the cash value before death is to surrender the policy. Axelton notes withdrawing the full cash value of the account cancels your policy, and this may be a viable option if your named beneficiary has died or the death benefit is otherwise unneeded. You won’t receive the full cash value, however, as you’ll need to pay surrender fees and taxes.
 
Permanent life insurance policies, which cover you for your full life or up until the age of 99, offer cash value as well as a death benefit. You can opt to use the former to bolster the latter, which is paid to your beneficiaries on death. Axelton notes cash value left untouched at the time of death reverts to the insurer. Given that permanent life insurance can be significantly more expensive than term life insurance, you’ll want to make sure that you’re getting the most out of this benefit.
 
What is death benefit?
 
A death benefit is a standard perk of both term and permanent life insurance and the most commonly understood advantage of having a policy. According to Bankrate contributor June Sham, the death benefit is the predetermined sum of money paid to a beneficiary at the time of the policyholder’s death. Depending on your situation, you can name your spouse, children, friends, or even charitable organizations as your beneficiary.
 
While death benefits are intended solely for your beneficiaries, Sham notes some policies offer living benefits. This includes cash value as well as perks like an accelerated death benefit rider, which allows you to access funds if you’re diagnosed with a terminal illness, or a rider that pays back the lifetime cost premiums if you’re still alive at the end of a term policy. These benefits are not always common and may increase your monthly premiums.
 
Sham notes the process of obtaining death benefits is fairly straightforward. The surviving beneficiary will have to provide a copy of the policyholder’s death certificate to the insurance company and initiate a claim. Typically, once the death of the policyholder is confirmed, the benefits are distributed in as little as a few weeks or months. Benefits can be paid out in a lump sum, installment payments, as an annuity, or through a retained asset account.
 
Making end-of-life decisions can be difficult because the process forces us to reconcile our mortality. But taking the time today for action like obtaining life insurance and drafting a last will and testament can help give you more peace of mind the closer you get to your twilight years.