Ask the Life Insurance Expert
What is guaranteed cash value in a life insurance policy?
Guaranteed cash value is a cash account that gradually builds over time as part of a permanent life insurance policy. Permanent life insurance insures you for an entire lifetime, so once the policy goes into effect, the life insurance company pays a death benefit no matter when you die.
As you pay premiums, the policy's cash account grows each year with interest, tax-deferred, as a sort of enforced savings account, which you can use at a later time for emergencies or temporary needs.
Once the cash value account has reached a certain level, you can use it to pay premiums; at that point, the policy is known as being "paid up." You have to resume paying premiums, though, if you withdraw some of the cash from the account. You can also borrow against cash value at an interest rate that is typically lower than what you could get at a bank. You don't have to repay the loan, although failing to repay it would reduce the death benefit, lowering the amount of money your heirs would receive upon your death.
The cash account is one reason premiums are higher for permanent life insurance than for term life. Term life insures someone for a certain period, such as 10 or 15 years. The policy pays out if the person dies in that time span. Term life is a good choice for someone who wants life insurance to cover mortgage payments and other living expenses, as well as college tuition for their children, but doesn't see a need for life insurance once the house is paid off and the kids are grown up. Term life does not have an accompanying cash value account.
Whole life is a good choice if you want the savings option that the cash value provides, you want to provide for your heirs no matter when you die or you have a large estate to protect. The heirs could use the death benefit to pay estate taxes.
For more, see life insurance basics and cash value in life insurance: what's it worth to you?