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.

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