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Does the life insurance beneficiary get both the death benefit and the cash value?

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Whether or not a life insurance beneficiary gets both the death benefit and cash value of a policy depends on the type of life insurance policy and the specific policy terms. Term life insurance policies do not carry cash value.

For those permanent policies that do have a cash value, some award beneficiaries with cash value payouts and some do not. Review the different types of life insurance policies and different payout scenarios below.

So, what are the different types of life insurance policies that you have the option to purchase? Read on to learn more and then be sure to get free insurance quotes by entering your zip above!

Term Life Insurance

The first type of life insurance is called term life insurance. This policy has a start and more importantly, an end date. If the insured dies within the policy term, the beneficiary will receive the intended death benefits.

However, if the policy lapses or expires prior to the insured’s death, the beneficiary will not receive anything. If the policy lapses due to non-payment AFTER the insured’s death, the beneficiary will still be paid death benefits. Typically this type of policy will come with an option to renew at the end date- although more often than not, the premiums will be higher.

Permanent or Cash Value Life Insurance: Whole and Universal

The second type of life insurance is often referred to either permanent or cash value policies. This type of insurance also includes both universal and whole life policies. A whole life insurance policy has more rigid terms that must be adhered to such as specific policy payment dates, a cash value account which can be used to pay the premiums, and other specifications.

A universal life insurance policy gives more flexible terms to the premiums and cash value accounts. Premiums can be paid as billed and on time, more than billed, less than billed, or even no payment. These types of policies are used to stabilize the premiums over the course of the policy. Further, they offer a cash value account in which can be drawn from to pay for the premiums, although this will reduce the death benefit.

So if you have a permanent life insurance policy, you may have a cash value associated with your policy. However, it again depends on the specific type of permanent life insurance policy that you have, and more importantly, it depends on the company. Some companies will not pay the cash value and will only pay the stated death benefits; others will pay out both the cash value (as long as there are not pending loans from it) as well as the death benefits.

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Tax Advantages to Cash Value Policies

There are definitely certain tax advantages that can be enjoyed by choosing a cash value life insurance policy. Here are a few to keep in mind when comparing policies:

Your beneficiaries do not need to pay income tax on the death benefit payouts (although this is actually true for the term life insurance policy as well).

There are some loopholes for avoiding some estate taxes on the benefits proceeds. For example, if you name your estate as the beneficiary, this will be included in the estate taxes. However, if you name specific beneficiaries, the estate taxes may be avoided. There are other requirements such as the beneficiaries need to be named three years prior to the insured’s death, so be sure to work with your insurance professional to make sure the plan is structured properly.

You are not required to pay income tax on the interest, earnings, or other gains that come into the cash value account.

Further, you do not need to pay income tax on the borrowed money from the cash value account. The loans from the cash value account to pay the premium are not able to be taxed. Further, the loans are not necessary to be repaid, although they will deduct from the death benefits. That said, there are certain scenarios in which the cash value could be taxed if there is a surrender of the policy or if a minimum ratio of cash value to death benefit is not kept up.

Finding the Best Life Insurance Rates

The first step to finding the best type of life insurance policy for you is to understand what type of policy you want and need to protect your loved ones. If you prefer to have term life insurance policy, you will not need to worry about the cash value payout because this type of policy does not include a cash value account.

If you decide that a permanent life insurance policy better fits your needs, you must research the company and policy carefully to understand what the cash value allows you to do during the policy period. Further, you must make sure that the company explicitly defines what happens to the cash value account once you pass away.

To find life insurance that will protect your loved ones, try using our free life insurance quote tool now!

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