Difference between Death Benefit and Cash Value Insurance Policies

Death Benefit

The death benefit is one of the most important benefits available in most insurance policies. It is defined as a tax-free payout that is paid to the beneficiary or beneficiaries who have been named by the insured (while purchasing the policy) after their unfortunate demise. This insurance benefit is payable to the beneficiaries of the insures on the two preconditions:

  • The existing policy is active and has not lapsed
  • At the time of death, there are no arrears in terms of the premiums payable

The death benefits are payable by the insurance company to the survivors who were named by the insured in the policy. The insurance companies offer a total death benefit policy for the total amount that the insured party deems as appropriate. The insurance company also pays the death benefit amount as a tax-free transfer to the named beneficiaries after they are made aware of the unfortunate demise of the insured, which will help the beneficiaries make proper use of the funds.

Cash Value Insurance Policy

The permanent life insurance policies also possess a cash value savings component. This cash value is defined as the total amount that is left out of the money paid in terms of premiums after deducting items like the cost of insurance, along with the other fees. The cash value option is available to the insured till the time they are alive. The insured can also access the cash by choosing to surrender a part of their insurance policy or use the option of taking out a policy loan. In the case of permanent life insurance policies like universal life or whole life, the insured individuals also have the ability to accrue the savings within the total cash value of the insurance policy. The total cash value of any life insurance policy is equal to the total amount of premiums that have been paid by the insured minus the total cost of insurance (including the other charges that have been assessed by the insurance company). The cash value balances are also prone to fluctuation. These fluctuations are based on the underlying investment where the balance gets allocated. Unlike the death benefit option, the cash value balance is available for the insured or the owner of any life insurance policy while they are alive, either through the partial surrender of policy or by way of policy loan. The remaining cash value that is left after the death of the insured gets forfeited to the insurer unless any specific rider is purchased by the insured to allow for the cash value component to be added to the death benefit.

Difference between Death Benefit and Cash Value Insurance Policies

Both the death benefit and cash value insurance policies have their advantages for the insured and their beneficiaries. These tools can become very important for the insured to ensure the basic fulfilment of their important needs. However, it is vital to understand that there are some major areas of difference between death benefit and cash value insurance policy and we need to focus on them below to get a better insight into this topic:

Death Benefit

Cash Value Insurance Policy

Definition

The death benefit is defined as a tax-free payout that is paid to the beneficiary or beneficiaries who have been named by the insured (while purchasing the policy) after their demise.

The cash value is defined as the total amount that is left out of the money paid in terms of premiums after deducting items like the cost of insurance, along with the other fees.

Availability of Balance

The death benefit option is available after the demise of the insured to their beneficiaries (mentioned by the insured in the policy when they were alive).

The cash value balance option is available for the insured or the owner of any life insurance policy while they are alive.

Access

The death benefit is accessible to the beneficiaries that have been named by the insured (while purchasing the policy) after their demise.

The cash value is accessible to the insured till the time they are alive.

Fluctuation

The death benefit amount is not prone to fluctuation.

The cash value can be prone to fluctuation.

Conclusion

Both death benefit and cash value insurance policy have several differentiating factors. They also have specific benefits for both the insurance company and the insured party. In spite of several points of difference between death benefit and cash value insurance policies, both these options have become vital to the insurance industry, and are also a preferred option among the consumers.

Frequently Asked Questions

What are the different types of permanent life insurance policies?

The different types of permanent life insurance policies are as follows:

  • Whole life or ordinary life insurance policy
  • Universal life or adjustable life insurance policy
  • Variable life insurance policy
  • Variable-Universal life insurance policy
  • What is a whole life insurance policy?

What is a whole life insurance policy?

The whole life insurance policy is one of the most common types of permanent insurance policy. It comes with the option of death benefit along with the savings account. By picking this type of a life insurance policy, the insured agrees to pay the premiums on a regular basis to avail the option of death benefit. The savings element is also a very important feature within the whole life insurance policy.

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