Ask the Life Insurance Expert
QWhat will happen to the cash value of my whole life insurance policy when I die?
The life insurance company will absorb the cash value, and your beneficiary will be paid the policy's death benefit.
Unlike term life, which pays a death benefit if you die sometime within the policy's term, permanent life insurance (such as whole life) covers you no matter when you die. Permanent life insurance also features a cash account that builds value. You can borrow against the cash value or withdraw money.
However, any outstanding loans at the time you die will reduce the death benefit for your beneficiary, and any non-loan withdrawals you make will be taxed at your ordinary income tax rate.
Another option for cash value is to use it to pay premiums. You have to wait until the cash account has accumulated enough value to do this; the policy then is known as being "paid up."
You have to be careful not to decimate the death benefit or put yourself into a bad tax situation by tapping into the cash value too much. But some experts warn it's a waste of money to accumulate a lot of cash value, only to have it go to the life insurance company when you die.
Maintaining the cash value when you're younger is a good idea. The cash account serves as a financial resource in case something comes up and you need to tap into the money.
But if you're older and sitting on a large amount of cash value you'll never need, consider asking the life insurance company for a higher face value in exchange for the cash value. That way, your beneficiary will collect a larger death benefit, and the cash value won't go to waste. Talk to your life insurance agent or call the life insurance company's customer service department directly for details.
For more information, see Cash value life insurance: What's it worth to you?.