Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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When the insured person dies, the cash value of a life insurance policy ceases to exist. In order to understand why this is, you need to know some of the terms involved in a life insurance policy.

This article will define death benefit and cash value as they relate to life insurance. It will also provide an explanation of the types of policies that have cash value and why this is important to your choice of life insurance.

When you take out a life insurance policy, that policy pays out a death benefit to your named beneficiary when you die. Clearly, this is the main point of this type of insurance.

Death benefits help your loved ones cover the cost of your funeral and possibly their living expenses depending upon the size of the benefit. Cash value is something else entirely.

Cash value is what the policy is actually worth to the policy holder at any given time. This is also referred to as the cash surrender value because it represents what the holder can receive in cash by canceling the policy completely. Term life insurance policies have no cash value. If they are canceled, the policy holder receives nothing and there will be no death benefit.

If a policy holder cancels a whole life or universal life policy they may receive cash based on how much in premiums they paid into the account. These accounts are said to accrue equity or value.

So why does cash value disappear when the insured dies?

The reason that cash value disappears when the insured dies is that you may receive either a death benefit or a cash value from a whole or universal life policy, but not both. So, if you die the proceeds from your premium are transferred into a check that is written out to your beneficiaries. If, however, you instead decide to surrender the account a check is written out to you directly. In this instance there is no longer a death benefit to pay out when you die.

The reason that the cash value of whole life policies is appealing is that, although the cost of this coverage carries a more expensive premium, that extra premium turns into cash value and helps pay the cost of your policy in later years. Thus, your annual will stay the same in the years when you are retired and are no longer bringing in a large income.

Term life insurance, although it carries no cash value, offers good coverage for a set and usually shorter period of time. Since the coverage ends after 10, 20 or how every many years designated the payments end.

Since there is no cash value, it’s not possible to cash in a term policy or take out a loan against it. Term life insurance policies generally increase at each term renewal. Convertible term life insurance policies give the owner the options to switch to a permanent life insurance option life whole life at a certain point in time.

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Benefits of Cash Value Policies

The benefits of cash value policies like whole, universal and variable life is that they offer a savings account of sort. If you don’t die, you can get some of your invested funds back by cashing in the policy. Some people see it as a safety net for savings in their elderly years.

Benefits of Non-Cash Value Policies

Term is the only non cash policy to speak of. The main benefit is that you pay less for the coverage. While you can’t expect any cash to result from this policy, it will provide a death benefit for your loved ones when needed.

Some financial advisors recommend taking out a term policy and investing the difference you would have paid in a cash value policy into other investments as they tend to be more lucrative.

Of course, the best life insurance policy will differ for everyone. Compare your options from several providers before making a commitment. The life insurance comparison tool on this page is a great place to start your search for the best life insurance rates right now!