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Ask the Life Insurance Expert

Q

I own a whole life policy which has a cash value. When I die, will my beneficiary receive both the death benefit and the savings portion (cash value)?

A

No, your beneficiary receives the death benefit, but not the cash account. As with so many insurance questions, though, there is an exception. If you purchased a rider on your policy that gives the beneficiary both the cash value and face value, then the beneficiary would receive both. Review your policy to see what the coverage entails. Such a rider, of course, would have resulted in a higher premium, so you'd probably know if your policy includes this benefit.

Besides the lifelong coverage permanent insurance provides, cash value is a big selling point. Term life provides coverage only for a certain period, such as 10, 15 or 20 years, and does not include cash value.

The cash value of a permanent life insurance policy, such as whole life, builds slowly at first and gradually picks up speed after several years. Each year the account grows with interest, tax-deferred.

What can you do with the money? When the account reaches a certain level, you can use the cash value to pay premiums. This is called being "paid up" on the policy.

You can also borrow against the cash value. You still have to pay interest if you repay the loan, but the rates are competitive. If you decide not to repay the loan and take the money as a withdrawal, then the amount, plus interest, will be deducted from the death benefit. In some cases, more than the amount of the withdrawal plus interest is deducted, which could slay the death benefit.

That's why it's important to understand the consequences before you make any withdrawals. Read your policy and talk to your life insurance agent about any questions you have.

For more, see cash value in life insurance: What is worth to you?

Last updated: Feb. 21, 2011