Add To Cash Value Option
an option available to life insurance policyholders allowing them to put dividends and interests earned through investment back into a cash value account.
Add To Cash Value Option Details
Life insurance premiums are periodic payments that cover beneficiaries in case the policyholder dies. In certain life insurance policies, insurers allocate a portion of their premiums to a cash value account. A policyholder can use cash value funds in numerous ways. They can increase someone's death benefit. The funds can cover some, if not all, premiums. They can even act as collateral for loans. Insurance providers can also make investments out of a cash value account to generate dividends and/or interests for the policyholder.
Normally, insurance companies distribute cash value investment earnings directly to policyholders. However, a policyholder can put earned interests and dividends back into their cash value account. For the short term, this will decrease the income a policyholder receives. But, adding to a cash value account can be an attractive option for those looking for a medium to long-term gain.
Policyholders have the freedom to choose whether or not to add to cash value, assuming the insurer has the appropriate policy in place. Not adding to cash value is a viable choice if the policyholder requires extra income regularly. That said, policyholders may also withdraw funds from the cash value account if they wish. They can use the money either for emergency circumstances or invest the capital themselves.
Add To Cash Value Option Example
Randy is a policyholder of a life insurance policy that provides a cash value account. His insurance company accumulates a portion of his semi-annual insurance premiums to the cash value. With the cash value, the insurance company manages various investment vehicles to generate returns for him. Since Randy is still young, he doesn’t have an immediate use for the extra income. He activates the add-to-cash value option.
Activating the option lets Randy grow his cash value account even faster. His insurance company reinvests dividends and interest back to the cash value account. Thanks to this, he has more money to fall back on in case of an emergency. Or, if the cash value account gets big enough, it can pay for the majority of his semi-annual premium expenses.
Another policyholder named Maya is a retired, ex-government worker who receives regular payments from her pension plan. But, she believes she needs extra income per month. She chooses to receive the returns from cash value investments as soon as possible. Thus, she doesn’t exercise the add-to-cash value option.
Significance of Add to Cash Option
The availability of the add-to-cash value option grants policyholders different ways to handle their insurance. Universal and whole life insurance policies usually offer a cash value account. These insurance policies incur pricier premiums compared to those that don’t have one. Term life insurance policies do not provide cash value options. They only distribute a death benefit and have no investment component. But this type of policy is cheaper.