Cash value is an amount of money accumulated from the premiums you pay, which you can access during the policy period. This feature is typically available in whole life or unit-linked insurance products that combine protection with investment.
When choosing a life insurance product, you may come across the term "cash value." This is a key feature found in certain types of insurance policies, especially traditional life insurance and unit-linked policies. Understanding how cash value works and the benefits it offers is essential to getting the most out of your policy.
Let’s explore what cash value is, how it works, and how it differs from the sum assured.
Cash value is an amount of money accumulated from the premiums you pay, which you can access during the policy period. This feature is typically available in whole life or unit-linked insurance products that combine protection with investment.
Unlike the sum assured, which is paid out only when a claim is made (e.g., due to death or critical illness), cash value can be used even before any insured risk occurs. It grows over time, depending on the insurer’s policy and the performance of the investment fund.
Cash value is not just a passive element in your insurance policy. It has several practical uses you can benefit from during the active period of your policy:
In situations like unexpected medical expenses or urgent financial needs, you can withdraw part of the cash value without canceling the policy. It acts like a long-term savings fund that you can tap into when necessary.
The cash value can also be used as collateral for loans from the insurance company. These loans are generally faster and easier to obtain than bank loans, as they require minimal documentation.
If you're facing financial difficulties and can’t pay your insurance premiums directly, you can use the available cash value to cover the cost. This helps keep your policy active and avoids any lapse in coverage.
Cash value is built from a portion of the premiums you pay. In whole life insurance policies, part of your premium goes toward protection, and the rest is invested by the insurance company.
Over time, this value increases through interest or investment returns. The growth rate depends on the insurer’s policy and the type of insurance product. In unit-linked policies, the cash value fluctuates based on the performance of the chosen investment portfolio.
While both offer financial benefits, cash value and the sum assured serve different purposes in an insurance policy:
Purpose of payout Cash value can be used while the policy is still active—for example, for emergencies or to pay premiums. Meanwhile, the sum assured is only paid when a claim is filed due to insured events like death or critical illness.
Timing of access Cash value can be accessed at any time according to the terms of the policy. In contrast, the sum assured is only paid after a claimable event and typically goes to the beneficiary.
Not all insurance types come with a cash value feature. It’s generally available only in whole life and unit-linked insurance products that include both protection and investment components.
Term life insurance, on the other hand, usually does not include cash value. It only provides a sum assured when a claim is made, without any redeemable value during the policy term.
Choosing an insurance policy with a cash value component can be a great option if you’re looking for long-term protection along with additional benefits like savings or emergency funds. It offers financial flexibility, especially during unexpected situations.
However, it’s also important to note that premiums for cash value policies tend to be higher. If you're on a tight budget and only need basic protection, a policy without cash value might be more suitable.
Understanding features like cash value helps you choose the insurance product that aligns with your long-term financial goals. Do you need just protection, or are you also looking for investment benefits and flexible payment options?
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