If you’ve ever wondered, “How fast does cash value build in life insurance?” you’re not alone.

When you leverage the power of a dividend-paying mutual whole life insurance policy, you can build cash value immediately!

However, that’s the short answer. The slightly more detailed answer: you can build it immediately, but there are trade-offs to spiking early cash value. Let’s dive in.

How Your Cash Value Grows

Perhaps you've looked at some of our blogs in the past. If so, you’re aware that we believe one of the best ways to understand cash value and death benefit in a dividend-paying mutual whole life insurance policy is to think about it like your home mortgage. The mortgage-free value of the home is like the death benefit in whole life insurance. If you’re like me, you’ve got a mortgage, with monthly payments funding both principal and interest on the loan. Payments toward the principal show up as equity in the value of your house while the interest payments are kept by the bank to pay the bank owners for providing a loan to you. 

A Life Insurance Policy is Serviced the Same Way as a Mortgage

Each payment towards a mutual whole life insurance premium consists of two pieces: the interest (or base) payment and the Paid Up Additions (PUA) rider. The base payment, like the principal in a mortgage, is invested by the insurance company to cover the death benefit. The second part, the PUA rider, builds the policy’s living benefit – its cash value. As a bonus, with mutual whole life insurance, we, the policyholders, are essentially the “owners” of the insurance company, so dividends can increase our PUA payments, boosting cash value.

For example, if you wanted to purchase commercial real estate or a second home, you might tap your home’s equity via a line of credit. Similarly, with a dividend-paying whole life insurance policy, you can borrow against the cash value you’ve accumulated.

Sooner Isn’t Always Better

With this in mind, you can design a policy for a much faster cash value release rate in the early years, or you can design a policy that continues to build and grow until death. Most people who learn this say, “Well why wouldn't you just buy cash value immediately?” You certainly can, and we have and do design policies that way. However, it’s critical and ethical to inform consumers of both the pros and cons. 

Policies designed to maximize early growth are called short-pay policies. The benefit of a short-pay policy is in the early cash value. The biggest downside is that the policy doesn’t typically live very long–usually only 7, 10, or just 15 years. Given the uninterrupted compounding nature of dividend-paying mutual whole life insurance, the longer they’re in existence, the more growth potential your cash value will have. With short-pay policies, we  dramatically limit both the volume of capital and the long-term economic value of life insurance. 

How to Decide What’s Right for You

Like all things in life, there are tradeoffs. Your situation is utterly unique and different from any other client’s. While there are many benefits, perhaps the biggest upside of dividend-paying whole life insurance is that it’s customizable. You can create a bespoke, plan crafted to fit your specific goals.

As a helpful guidepost, we challenge clients to assume the current policy they’re building and funding will be the only one they own forever. As such, the most important point still remains access to and rapid accumulation of cash value. However, think about the total underwriting amount, retirement benefits, and estate planning benefits. Consider how the volume of cash flow that you initially put in earns a tax-free, uninterrupted rate of return, and how you can leverage that growth to finance your needs and goals. These factors often change the dialogue dramatically. Like all things in investing and in life, a short-term or immediate mindset oftentimes does not lead to the best outcome.

That being said, we find short-pay policies tend to work for college planning, the decade preceding retirement, or for specific and unique estate planning situations.

At The Owner's Asset, we’re well-versed in wealth management, estate planning, tax mitigation, investments, and insurance. More importantly for you, we have the expertise to blend all of these disciplines on a unique, per-client basis. Reach out to let us know what your goals are and start planning for your future more effectively. We look forward to working with you!