One of the major living benefits of whole life is called cash value. Cash value is basically equity in life insurance. It’s an amount of money that the life insurance company is contractually bound to give you if you want to sell your policy back to the company.
Cash value has some powerful characteristics. First, it’s guaranteed. You can’t lose cash value. This satisfied people’s desire to put their money somewhere safe. In fact, money in life insurance is safer than in real estate. Unlike in real estate, the cash value in life insurance is contractually guaranteed.
Second, it grows. In fact, it grows at a compounding rate, meaning that the cash value grows at an increasing rate over time. This satisfied people’s desire to make sure that their cash didn’t just sit somewhere and not grow. In fact, the cash value of life insurance grows beyond what was paid into the policy in the form of premium.
Third, that growth occurs on a tax-deferred basis. This means that the value accumulates on a tax-free basis. It only becomes taxable if the policy were to be surrendered. This satisfied people’s desire to keep tax-advantages like they were used to with their real estate.
Fourth, cash value can be easily leveraged. This means that the owner of a whole life insurance policy can use his cash value as collateral on a loan from the insurance company. In fact, the policy owner has the contractual right to do this and there’s hardly any paperwork or waiting time required to access the loan. Because the insurance company itself is guaranteeing the value of the collateral (the cash value), it’s in no rush to collect on the loan. After all, if the insured person passes away before the loan is repaid, the insurance company takes their cut out of the death benefit.