What is an 'Add To Cash Value Option'

The add to cash value option is a common benefit option on life insurance policies wherein the policy owner allows the dividends from the policy to be used for the purpose of accumulating cash value, which adds to the overall death benefit.

BREAKING DOWN 'Add To Cash Value Option'

The add to cash value option allows policyholders, upon the death of the insured, to increase the death benefit for their beneficiaries based upon the cash value amount accrued within the policy.

When a universal life insurance policyholder uses the add to cash to value option, they policy owner can opt to participate in the surplus of the insurance company and receive the dividends annually. This option gives policyholders the opportunity to add the accumulated cash value to the face amount when the death benefit is paid. 

For example, on death, if the cash value accrued within a policy is $100,000, then under the add to cash value option, the beneficiaries would receive the face value of the life insurance policy plus the $100,000 cash value. However, the increased benefit option carries higher premiums for the policy owners.

Other Cash Value Options

While the add to cash value option provides a clear added benefit to heirs, there may be other options available to policyholders who wish to access the cash value of their life insurance policy during their lifetime. These options are typically available to those who own whole life or universal life insurance policies. Term life insurance policies generally do not come with cash value options. Here are some of the other possibilities for using a policy’s cash value:

  • One option for making use of a policy’s cash value while the policy owner is still alive is to apply the cash value toward life insurance premiums. In this case, the policy owner will reduce the cash value but use it to cover the cost of the insurance premium.
  • Once the cash value has accumulated to a substantial amount, withdrawing some of the cash value and treating it as an asset in a retirement portfolio can help a policyholder grow their retirement savings and income.
  • Policyholders also have the option of surrendering their life insurance policy in exchange for the full cash value. The tradeoff with this option is the policyholder loses the death benefit intended for the surviving beneficiaries.

While these options may help an insurance policyholder gain access to cash during their lifetime, the potential drawback is reducing or eliminating the death benefit meant for heirs while also incurring additional fees or higher premiums. The add to cash value option makes use of the cash value while boosting the benefit heirs will receive after the policyholder’s death.

RELATED TERMS
  1. Universal Life Insurance

    Universal life insurance is permanent life insurance with an ...
  2. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  3. Unbundled Life Insurance Policy

    An unbundled life insurance policy is a type of financial protection ...
  4. Level Death Benefit

    A level death benefit is a life insurance payout that is the ...
  5. Accumulation Option

    An accumulation option is a policy feature of permanent life ...
  6. Policy Loan

    A policy loan is issued by an insurance company that uses the ...
Related Articles
  1. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  2. Financial Advisor

    Index universal life versus whole life insurance: A comparison

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  3. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  4. Insurance

    How Life Insurance Can Provide Retirement Income

    Universal life insurance can generate tax-free retirement income. Here's how.
  5. Insurance

    Should You Buy Term or Permanent Life Insurance?

    When choosing between term or permanent life insurance you'll need to consider these factors.
  6. Financial Advisor

    Pros and Cons of Indexed Universal Life Insurance

    Indexed universal life insurance has its pros and cons. Here's what you need to consider before purchasing a policy.
  7. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
  8. Insurance

    Life Insurance: How Long Does It Take To Get Paid?

    How to file for a life insurance payout – and how long it takes to receive it. Plus, new ways to plan for payments that provide an income stream.
  9. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center