How Can You Have The Cash Value Of A Life Insurance Plan Be More Than The Death Benefit?
Posted February 6, 2010 – 10:20 pm in: structured settlements FAQI am taking an insurance class and it doesn’t matter to the answers but I would like to know. I can figure it out if you only have to pay until you reach the face value how can you have more cash value? Is it interest?
Tags: Benefit, Cash, Death, Have, Insurance, Life, More, Plan, Than, Value
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You can’t. With a whole life-type policy, once your cash value equals your face amount, the policy “endows” and you get a check for that amount (basically).
With a universal life-type policy, after a certain point the face amount increases with the cash value – even if you choose to have a level face amount. This effect is called the “corridor of insurance”. Without the corridor of insurance, the policy would stop being insurance once there was too much cash value. With it, the policy may remain in force indefinitely.
To get technical for a minute, that is how the face amount operates, not the death benefit. But since the death benefit is the face amount minus and loans (which would also count against the cash value), they run parallel to each other.
In the real world, having so much cash value the policy endows or pushes up the death benefit is usually not a good thing. (Because it probably means your clients are paying in too much.) So it’s good to know for the test, but not useful except for some rare advanced planning cases.