What is the Add to Cash Value option?
Add to Cash Value Option Cash value is a contractual term found in life insurance policies. By exercising the add to cash value option, the policyholder allows the dividend earned on his policy to be added to the cash value of the policy instead of being paid to the policyholder.
- The add to cash value option is a provision found in many life insurance contracts.
- It allows the policyholder to reinvest the dividends earned within his policy into the policy’s cash value account.
- This in turn can lead to higher benefits in the future, such as allowing the policyholder to borrow or withdraw against the cash value of his policy.
How add to cash value options work
Holders of cash value life insurance pay premiums for their insurance coverage, a portion of which is directed into the cash value account. This cash value can then be invested by the insurance provider on behalf of the policyholder, collecting interest and dividends in the process. The policyholder can use the cash value in his account in a variety of ways, such as to pay monthly premiums for the policy, or as a source of collateral for a loan.
To help build their cash value more quickly, policyholders can choose to automatically reinvest the dividends earned on their account into the account’s cash value. While this will reduce the income paid to the policyholder in the short term, it can benefit the policyholder in the medium or long term.
Ultimately, the decision to exercise the add to cash value option will depend on factors such as the policyholder’s short-term cash flow needs and the potential for long-term returns on the investment within the insurance policy. Eventually, the policyholder can withdraw all or a portion of his accumulated cash value and invest the proceeds himself. Therefore, when deciding whether to reinvest their dividends into their cash value, policyholders will first want to evaluate the level of return they can expect from their insurance policy going forward.
Real World Example of Add to Cash Value Option
Michaela is a young professional who has recently purchased life insurance. Under the terms of his insurance contract, a portion of his monthly insurance premium is deposited into a cash value account that is managed by his investment company on his behalf. The insurer invests in various investment vehicles with the intention of increasing this cash value over time.
Since she is in her early 30s, Michaela has a long-term investment horizon. Therefore, she decides to add in a cash value option to her insurance contract, allowing the dividends earned on her cash value account to be reinvested in the policy. Their intention to do so is to allow the policy’s cash value to grow more quickly over the medium and long term.
Eventually, Michaela can benefit from this cash value through actions such as borrowing against the cash value, withdrawing the cash value, or using the cash value to pay some or all of your monthly insurance premiums.
How does Add to Cash Value work?
A policyholder chooses to add dividends earned on his policy to the cash value of the policy instead of being paid to the policyholder. This allows accrued dividends to be reinvested in the policy with the intention of helping the cash value to grow more quickly over the medium and long term.
What to consider before choosing the Add to Cash Value option:
Factors such as the short-term cash flow requirement of the policyholder and the potential for long-term return on investment within the insurance policy should be considered. The policyholder can choose to withdraw all or a part of his accumulated cash value and invest the proceeds himself. Policyholders should evaluate the level of return they can expect from their insurance policy before opting for this option.