If you have cash value life insurance and die, the life insurance company will absorb the cash value and your beneficiaries will be paid the policy’s death benefit. Your beneficiaries will not get any of the cash value, because the policyholder can only use the cash value of a life insurance policy while they are alive. The cash value is not paid out to beneficiaries. However, some life insurance policies allow you to increase the death benefit as you grow the cash value.

Cash value life insurance can be complicated, and it is important to consult a financial advisor before incorporating it into your financial plan.

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KEY TAKEAWAYS

• Insurers will absorb the cash value of your whole life insurance policy after you die, and your beneficiaries will receive the death benefit.
• The policyholder can only use the cash value while they are alive.
• If you have a paid-up insurance rider, you may be able to grow your policy’s death benefit as you grow the cash value.

How does the cash value work?

While you’re alive, you can borrow against the cash value or withdraw money. You can also use the cash value to pay your premiums. However, you have to wait until the cash account has accumulated enough value and is “paid up,” which takes decades. 

All of this comes at a cost — if you borrow from cash value, you have to pay interest if you repay the loan. If you decide not to repay the loan and take the money as a withdrawal, the amount, plus interest, will be deducted from the death benefit. In some cases, more than the withdrawal amount plus interest is deducted, which could wipe out the death benefit.

Any outstanding loans at the time you die will reduce the death benefit for your beneficiaries. Also, any non-loan withdrawals will get taxed at your ordinary-income tax rate.

Learn more about cash value life insurance here. 

What happens to the cash value in my whole life policy after I die?

When you die, any remaining cash value in your life insurance policy goes back to the life insurance company. If you haven’t utilized the funds put into the cash value, you’ve wasted years of premiums.

On the other hand, if you did use the cash value of your policy, it could have repercussions on how much money your beneficiaries receive. For example, if you took out a loan against your policy’s cash value and did not pay it back, the insurance company will deduct it from the death benefit — with interest. 

Before you sign up for a cash value life insurance policy, you should consult a financial advisor about the implications of such a policy on your financial and estate plans. 

When do beneficiaries get the cash value and the death benefit?

Usually, the cash value can only be used while you, the policyholder, are alive. The cash value remains completely separate from the death benefit, and cannot be accessed by your beneficiaries, even when you die.

There is one scenario where beneficiaries can access your policy’s cash value: if you purchased paid-up additional insurance. Paid-up additional insurance is a rider that allows for the death benefit to increase alongside the cash value. This rider is not widely available, so you’ll need to check with your insurer if you have access to this option.

Cash value policies can be an important financial planning tool for people with high incomes, but they don’t provide funds for your beneficiaries after you die. If you bought life insurance to provide funds for your family, you’ll want to carefully lay out your financial plan and ensure that your policy’s cash value doesn’t diminish the death benefit. 

Does the cash value impact the death benefit?

After the insured dies, a whole life insurance policy usually pays out just as any other life insurance policy does. The beneficiaries file a claim and receive the death benefit to use however they wish. 

But if you borrowed against the cash value and never paid it back, that amount will be deducted from the final death benefit amount. Additionally, if you withdrew from the cash value, that amount will also be deducted from the death benefit paid out.

But, if you leave the cash value as is, your policy’s death benefit will remain stable and your beneficiaries will receive the entire lump sum.