What is the difference between the death benefit and cash value of an insurance policy?

Career / Compensation, Insurance
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April 2017
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The Death Benefit is what the Insurance company pays out to the beneficiary when the insured individual passes away.

The Cash Value is the amount of cash the Owner of the policy has access to by taking out a loan on the policy, making a withdrawal from the policy (if it allows you to do so), or when the policy is canceled, the Owner receives the cash value assuming there are no surrender charges, fees you pay when you cancel a policy within the first 10 to 20 years.

Depending on the type of policy, the beneficiary can receive both the cash value and death Benefit. But in most cases, when the insured dies, the beneficiary only receives the Death Benefit and the Insurance company keeps the cash value. So let's say someone has a $100,000 death benefit and a $30,000 cash value. When they die, their family would get a check for $100,000. I know that some people struggle with the concept of the insurance company keeping the $30,000, but the insurance purchased was for $100,000, the cash value represents excess premium paid and an interest rate paid by the insurance company. The difference between cash value and the death benefit is what insurance companies call "Net amount at risk" as in it's the amount they're on the hook for. The $30,000 would represent the return of part of the premium and some interest and the other $70,000 would be the insurance amount totaling $100,000. Imagine a situation where the $30,000 would keep growing over many years and it becomes $100,000. That's when a policy "matures", meaning that the death benefit and cash value is the same amount, the insurance company has no risk anymore, and that the owner has effectively paid for their own insurance because what they have is a glorified savings account.

Term Insurance is a type of Insurance that doesn't have any cash value, and it's why it's the least expensive because none of the monthly cost is going into a "savings account" called cash value

I don't think I've ever written this much about life insurance, is anyone still awake?

April 2017
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