Cash value is the amount of money that has built up in your permanent life insurance policy — the amount that:

• Will be paid to you if you cancel your coverage or
• Can be used in a variety of ways — most commonly by borrowing through a policy loan.

If you cancel a permanent life insurance policy, you will receive your present cash value minus

1. Any money you've borrowed from your policy, in the form of a loan, and not yet repaid,
2. Any unpaid interest on a policy loan, and
3. In limited cases, a cancellation, or surrender charge. This will be stated in the policy.

Cash value is an important benefit of permanent life insurance and is not available with term insurance. What is permanent life insurance? Often referred to as whole life insurance, it covers you during your whole life — until you die. Generally speaking, premiums for whole life insurance are set at the time you buy the policy and do not increase as you grow older. Term insurance, by contrast, provides coverage for a specified period, and its premiums typically do go up at specified intervals. Northwestern Mutual's combination products, which blend both permanent and term insurance, offer cash value benefits but may have premiums that increase.

Over the years, the cash value of a whole life policy grows. How does that work?

• With a whole life policy, you pay larger premiums in the early years than would be required for insurance protection alone. This extra amount builds a guaranteed cash value for your policy that increases each year. The cash value offsets the cost of insurance in the later years and keeps the premiums from rising as they would with term insurance. By the time your policy reaches its maturity date, your cash value will equal the policy's original death benefit.
  
  
• Northwestern Mutual also pays dividends to its policyowners whenever possible. Through dividends, policies are able to participate in the company's general investment portfolio and receive more than the guaranteed cash value. How?
  
  Dividends are partial refunds of the money policyowners have paid in premiums. When Northwestern Mutual refunds this money, it does so because during the previous financial year, the company did better than expected in any or all of these areas:
  
  • Returns from the company's general investment portfolio
  • Money paid in claims and
  • Expenses

Dividends can be used in a number of ways. When you use dividends to buy more insurance, instead of taking them in cash, you add to your policy's cash value.

How much is your policy's current cash value? You can find this information on your policy's annual statement. That statement will show the total cash value of your policy. If you have taken out any money through policy loans, the statement will also show the net cash value, the cash value that remains after deducting the loan and interest due.

The death benefit is the amount of coverage stated in your life insurance policy or, to put it another way, the amount that will be paid to any beneficiaries upon your death. As an example, a $100,000 policy begins with a death benefit of $100,000. This is also referred to as the "face value" or "face amount" of the policy. Over time, this initial death benefit can increase if you use your dividends to add more coverage to your original policy. Conversely, your death benefit can decrease, if, for example, you borrow money from your policy or take cash from the policy in other ways.

The cash value, on the other hand, is the amount of money that builds up in your permanent, or whole, life insurance policy from the premiums you've paid or the additional insurance you've purchased with dividends. Your cash value on a $100,000 policy will start small and may, for instance, be only $1,000 in the early years. Yet cash value will grow over time and when your policy reaches its maturity date, the cash value will equal the death benefit.

The cash value of a permanent or whole life insurance policy can be a reassuring source of money in times of need. For example, during a difficult financial period, it can help meet expenses. Some people use money from their policies to pay for their children's college expenses or to help purchase "wish-list" items, like a vacation home or a boat. It can also be used to supplement retirement income.

There are a number of ways of obtaining cash from your whole life policy:

1. You can borrow money from your cash value through what is called a policy loan. This is the most common way of obtaining money from your policy.
   
   
2. You can give up (surrender) any additional insurance you've purchased with past dividends and receive the amount of cash value related to that additional insurance.  See "What are dividends and why are they important?" section for an explanation of dividends.
   
   
3. You can take future dividends in cash, instead of using them in other ways. With some policies there are restrictions. Also, if you're still paying premiums on your policy, it will often make more sense to use dividends to directly reduce your premiums rather than take them in cash and pay your premiums separately.
   
   
4. You can cancel your life insurance coverage and receive the cash value in a lump sum or as a series of regular payments. Note: The amount of any policy loan, including interest owed, will be deducted from the money you receive.
   
   
5. You can use your policy as collateral for a loan from a lender, such as a bank or savings and loan.

Note: While your cash value is always available to you, you should use it judiciously because borrowing against your cash value has consequences:

• When you borrow money from your cash value, you will be charged interest. When you die, the unpaid loan amount and any unpaid interest will be deducted from the death benefit your beneficiaries receive.
  
  
• When you borrow money from your policy, you will likely reduce the dividends you receive.
  
  
• If you borrow too much from your policy, typically by further borrowing from the cash value to pay interest on the original loan, there may be tax consequences and you may risk losing your coverage altogether.
  
  
• Taking past or future dividends in cash can also have tax consequences.

Often called the "living benefit" of life insurance, cash value can help you, the person who owns the policy, while you're alive. Keep in mind, though, that when you use your cash value, you can defeat the purpose of protecting those who depend on you by reducing or eliminating the life insurance coverage. By not borrowing from your life insurance policy or taking the cash value in other ways, you ensure that your beneficiaries will receive the largest possible death benefit.

Northwestern Mutual is a mutual company, which means that the company is owned by its policyowners, not stockholders. Therefore when the company does well, it's able to return money to its policyowners in the form of dividends, a kind of refund of a portion of your premium payment. This is different from the "dividends" that are paid by companies that issue stock.

Dividends, however, are never guaranteed — because from year to year the factors that strengthen or weaken dividends change. It's also possible that the factors themselves could change.

Think of the way a mutual insurance company works as a three-legged stool because there are three factors that affect its ability to pay dividends each year:

1. The income the company earns from its investments.
2. The amount of money it pays in claims.
3. The expenses it pays for operating the company.

Each "leg" of this three-legged stool changes every year, affecting the company's gains, and therefore, the total amount of dividends it can pay. At the end of each year, the company reviews these three factors to determine the dividend payment.

Dividends are important because they can be used in a variety of ways, including the following:

• You can apply dividends to your policy to increase your insurance coverage. Doing so increases both the policy's death benefit and its cash value. Over time, such increases can be substantial. This additional insurance coverage is referred to as "paid-up additions."
  
  
• You can apply dividends to your premiums to reduce your out-of-pocket premium cost.
  
  
• You can take dividends in cash. Some policies have restrictions and if you're still paying premiums on your policy, letting Northwestern Mutual credit dividends to directly reduce your out-of-pocket cost is usually more convenient than taking dividends in cash and making a separate premium payment.
  
  
• You can use dividends to repay a policy loan.

Cash value grows. In fact, in most cases, it grows without income tax. Here's an overview:

Cash value grows the longer you own your policy. Whole life insurance is also sometimes called cash value insurance. That means your premiums buy insurance coverage and build a guaranteed cash value that increases each year your policy remains active.

Dividends add value. Northwestern Mutual is a mutual company, which means that the company is owned by its policyowners, not stockholders. Therefore when the company does well, it's able to return money to its policyowners in the form of dividends, a kind of refund. You may take these dividends as cash, use them to pay premiums, or use them to add more insurance coverage to your current policy. In some limited cases, there may be restrictions because of unique policy features. If you use dividends to purchase additional insurance, they will also create additional cash value. The additional life insurance coverage that is bought with dividends is sometimes called paid-up additions.

Policy expenses affect cash value growth. In the early years, the cash value of your policy grows more slowly. The premiums you are paying at that time not only buy coverage, they are used in two other ways:

• A portion of your premiums pay your Financial Representative for his or her time and expertise in developing a policy strategy that fits your individual needs.
  
  
• Your premiums also are used to cover the administrative cost of setting up your policy.

Some policyowners can get discouraged in the early years when cash value growth is slower. They may be tempted to cancel their policies because they feel their cash value is not increasing "fast enough." Canceling your policy in the early years is often a mistake because you could be giving up the policy at the point when it is beginning to show stronger growth — after the policy's initial expenses have been covered.

Cash value growth is generally not taxed. While the growth of your policy's cash value may be relatively slow in the early years because of these expenses, your cash value over a longer period of time increases substantially and that growth is not subject to income tax as long as it is not taken from the policy. If dividends are used to buy more coverage, the growth is even stronger.

By keeping your policy over a long time, you will benefit from the policy's growth as will your beneficiaries, who will generally receive a death benefit free of taxes.

Borrowing slows growth. While you can never hamper growth in the part of your policy's cash value that is guaranteed, borrowing money from your whole life policy incurs interest and can hinder the cash value growth produced from dividends. It works this way:

• When you take out a policy loan, you're charged interest to make up for the fact that the money you've borrowed is no longer earning money as part of Northwestern Mutual's portfolio, the company's general pool of investments. The interest rate is set as part of your policy contract.
  
  
• Furthermore, in most cases, dividends are paid at a different rate when cash value is borrowed. While all of your cash value is eligible to earn dividends, lower dividends are paid on the portion of your cash value that has been borrowed. Higher dividends are paid on the portion of your cash value that remains intact (not borrowed). Northwestern Mutual adopted this approach for most policies in the early 1980s to ensure that all policyowners shared fairly in the company's overall investment returns. Thus, policyowners whose money contributes to overall investment returns earn higher dividends than those whose money is not available to be invested because of a loan.

Your traditional whole life policy has a cash value. Cash value is the current worth of the policy. If you don't know the current cash value of your policy, you can find it on your annual statement or by talking to your Financial Representative. In the early years of your policy, your cash value will be relatively small, but it grows with every passing year, providing that you do not borrow from your cash value or fail to pay your premiums. Over time, the cash value growth of your policy can be substantial.

The death benefit of your policy is paid to your beneficiaries upon your death. However, the cash value of your policy can benefit you, the insured, while you live. You can borrow some or all of the cash value of your policy if you find yourself in need of money for any reason, such as to fund a college education, to take advantage of an unexpected business opportunity, to help with expenses if you lose your job, to help pay for a medical catastrophe or to supplement your retirement income.

While knowing that you can borrow some or all of your cash value in time of need can indeed be comforting, you should also realize that withdrawing cash value does have a cost. Here is a quick overview of the consequences of borrowing against your policy's cash value:

Borrowing reduces the policy's earning power. Whenever you withdraw money from your policy, it is no longer available for Northwestern Mutual to invest in its portfolio, the company's general account of investments. As a result, in most cases you reduce the rate at which dividends are paid on the amount borrowed.

Borrowing adds interest payments. Because this is a loan, you will be charged daily interest — at a rate stated in your contract. You can choose to pay the interest out of your pocket or deduct the interest from your cash value by adding to the amount of your loan. However, if you choose the second way, you will further reduce the number of dollars (the earning power) of your policy. You'll be earning less at the same time you are paying interest.

Borrowing reduces your death benefit.By withdrawing money from your policy, you decrease the amount of its death benefit. For example, if you borrow $15,000 from a policy with a $100,000 death benefit (or face value) and you die before you repay the loan, your death benefit falls to $85,000, minus any unpaid interest on the loan. That's why paying back the loan as soon as possible protects the interests of your beneficiaries.

Note: Repaying your loan restores your death benefit. If it is important for your beneficiaries to receive your full death benefit, it is in your best interest to repay your loan. Consequently, we try to make returning money to your policy easy and convenient. You can repay your loan in a variety of ways: automatic bank withdrawals, systematic installments, payments based on convenience, lump-sum payments, and using dividends. Using dividends to repay loans can slow the growth of cash value. To learn more about these options, ask your Financial Representative, or talk to someone in the Network Office near you. Locate your Network Office.

Borrowing can eliminate coverage altogether. If you have borrowed substantial amounts of money from your policy or, having borrowed substantial amounts, you've also relied on your cash value to pay the accumulating loan interest, you can find your insurance coverage in jeopardy.

By continuing to take money from your policy's cash value, you run the risk that your loan and interest will grow larger than your cash value. If that happens, you can "save" the policy by making a required payment that includes a premium payment as well as repayment of a portion of the loan and interest. In some instances, that out-of-pocket payment can be substantial. If you don't make that payment, the policy will terminate, and you will likely have to pay a significant amount in taxes. This situation, referred to as a " surrender squeeze," can be avoided by limiting the amount of money you remove from the policy.

Note: If you are in danger of a "surrender squeeze," you will be notified by Northwestern Mutual of that fact.

If you get yourself into a surrender squeeze, you must either—

• Eliminate your coverage and pay taxes to the federal government or
• Pay premiums, a substantial portion of your loan, plus any interest owed to Northwestern Mutual to save the policy.

It's a "squeeze" because either way you must pay — the IRS or Northwestern Mutual. You can avoid the "surrender squeeze," by limiting the amount of money you remove from the policy.

Borrowing can have tax consequences. As long as you continue to pay your policy premiums and keep cash value in your policy by paying interest on any policy loan, you will generally not have to pay income tax on any of the following parts of the policy:

• Any money you receive through a policy loan (by borrowing from your cash value)
• Any cash value that remains in the policy (unborrowed)
• Any dividends you've used to buy additional insurance
• Any dividends you've taken in cash, or used in other ways, up to the amount you've paid in premiums (also known as the policy's basis).

Taxes could become due, however, if a policy is cancelled or terminated before the person who is insured dies. In that case, income taxes will have to be paid on any money received from the policy that is more than the policy's basis, which is equal to the amount paid in premiums. The money received, and subject to possible tax in this case, would include:

• Any existing policy loan
• Any unpaid loan interest
• Any cash value that remains in the policy (unborrowed)
• Any dividends you've taken in cash or used other than to buy additional insurance
• Any money you've received through the surrender of insurance originally purchased with dividends

Remember that with whole life insurance, you can count on the policy's benefits being completely free of income taxes only when they go to a beneficiary as a death benefit. Note: While death benefits are free of income tax, they may be subject to estate taxes.

Saving a policy that has been depleted through borrowing. If the amount borrowed and the interest on the loan ever exceed the cash value of the policy, you could face what has been termed a "surrender squeeze." Making what can be a substantial out-of-pocket payment can "save" the policy. However, if you fail to provide the minimum payment in the allotted amount of time, the policy will fail, and the tax consequences will apply.

If you have been using dividends from your policy to increase the original insurance coverage of your policy, you may be able to remove cash from your policy by giving up, or surrendering, that additional insurance (so-called, paid-up additions). It depends on the type of your policy and how long you've owned it.

By giving up the additional insurance coverage you've purchased with dividends, you will receive the cash value from that coverage. Taking money out of your policy in this way will also have the following effects:

• It will reduce your life insurance coverage (the death benefit).
• It will reduce the cash value of the policy.
• It will likely reduce future dividends.
• It may have tax consequences.

As a general rule, when you receive money by giving up (surrendering) your additional coverage, only some of that money is subject to income tax — the amount that is greater than the basis of the policy. What's the basis of the policy? It's equal to the amount of premiums you've paid for the insurance, minus any money previously taken from the policy ? either dividends taken in cash, previous surrenders of insurance or money taken from the policy in ways other than through a policy loan. As long as the policy remains in force, policy loans do not reduce the policy's basis.

Note that in the year that you give up (surrender) additional insurance to obtain cash, you will still have to pay the premium that's due. Also, to keep your policy active, you must continue to pay future premiums according to the original schedule and amount.

To get more information on the amount of money available from your policy, talk to your Financial Representative or someone in a Network office near you. Locate your Network Office. Either can provide you with a detailed assessment of your policy.

Yes. You have several options to temporarily reduce the amount of money you need to pay to keep your permanent life insurance policy active or "in force." Your Financial Representative or local Network Office can help you move ahead with these actions and can provide an "in-force illustration" so you can see the potential effect of any changes. Here are your options:

1. Use dividends to pay premiums. Instead of using dividends to buy more coverage, you can use them to help pay your premiums. This means, of course, that your policy's coverage will grow more slowly than it otherwise would have if you had used dividends to purchase additional insurance.
   
   
2. Give up (surrender) additional insurance you've already bought. If you've used dividends in the past to add to your original insurance coverage, you can give up some or all of that insurance, also known as paid-up additions. By giving up some coverage, you'll receive the cash value from that coverage, which can help pay premiums. However, you will also slow the growth of your cash value and could, in some cases, incur income tax.
   
   
3. Quit paying premiums. If you quit paying premiums, you can maintain coverage through a premium loan if you have a whole life policy that has cash value. You can make this option automatic at the time you buy a policy (by signing up for an automatic premium loan) or you can decide later. In either case, Northwestern Mutual will deduct the cost of your premium from the available cash value of your policy for as long as possible. Your policy will remain active because your premium has been paid, but the coverage, or death benefit, will be reduced by the amount of the loan plus accrued interest. You can repay the loan (and any interest that has accumulated on the loan), when your financial situation improves. It's a way to help you through tough economic times.

All of these options are temporary solutions. When your financial situation improves, you can resume paying premiums, repay your premium loan and, if necessary, change how your dividends are used. To learn more about these opportunities, talk to your Northwestern Mutual Financial Representative, or contact a Network Office near you.

There are also two permanent solutions, which allow you to quit paying premiums altogether. However, keep in mind, they are irreversible. You can:

1. Change your coverage. With this option you can, in certain circumstances, change your policy in one of two ways:
   
   
   • Maintain the original amount of your insurance coverage but for a shortened period of time by converting it to term insurance. This is called extended term insurance.
     
     or
     
     
   • Reduce your coverage, often substantially, but with no need to pay any further premiums. Under this option, your policy will still enjoy some cash value growth and potential dividends. This is called paid-up insurance.
     
     
2. Cash in your policy. If you decide to cancel (surrender) your policy, you will receive the cash value of your policy, minus any unpaid loans and interest due on those loans. However, once you've cashed in your policy, it no longer exists and cannot be reinstated. If you die, your beneficiaries will not receive any benefit and it's unlikely you'll be able to get the same coverage again (because of your current age, changes in medical condition, etc.). You may also have to pay taxes. See "Can I cancel my policy, 'cashing it in' for my cash value?" section for more information on canceling a policy.

If Northwestern Mutual does not receive your premium, you will receive a notice alerting you that you have failed to make a payment. Whenever you fail to pay your premium, you risk the possibility that your policy will lapse or be terminated. If that happens, you will no longer have coverage in the case of death, and you may not be able to put the coverage back in place.

Northwestern Mutual does offer options to help people who find themselves in a temporary financial bind and cannot afford to pay their premium. These "non-payment" options will help you maintain your coverage, but they should be used carefully because they carry a cost.

When you purchase a whole life policy, one of the options you're given is the use of an automatic premium loan to maintain coverage if you fail to pay your premiums for whatever reason. If you did not select the automatic premium loan option when you established your policy, you will have a chance to select this option later.

By using an automatic premium loan, you keep your policy active since the cost of your premiums is deducted from the cash value of your policy for as long as there is money available. You can repay this loan, and any interest due on it, whenever you are able. You should, however, be careful in using your cash value to pay premiums because you can put your insurance coverage in jeopardy. Remember that:

• When you have used all of the cash value in your policy, your insurance policy will be terminated and your coverage will end.
  
  
• If your policy is terminated, it's also likely you'll have to pay income taxes on the money you've taken from the policy to pay premiums.

Besides a premium loan, you will generally have two other options for continuing insurance coverage without further premium payments. Those options vary, according to state law. If you stop paying premiums, you can, in most cases:

1. Maintain the original amount of your insurance coverage but for a shortened period of time by, in effect, converting it to term insurance. This is called extended term insurance.
   
   
2. Reduce your coverage, often substantially, but with no need to pay any further premiums. Under this option, your policy will still enjoy cash value growth and potential dividends. This is called paid-up insurance.

If you receive a notice informing you of a missing premium, do not ignore it. Contact your Financial Representative or your local Network Office to discuss the issue as well as your available options.

Note: If you stop paying premiums, you will not automatically "cancel" a whole life policy. If you wish to cancel (terminate) your policy and receive any remaining cash value, you must notify Northwestern Mutual, your Financial Representative, or your local Network Office.

Yes. At the time you let us know that you no longer want coverage (a death benefit for your beneficiaries), we can cancel your policy. At that time, you will receive your policy's cash value, less the amount of any loan and any interest due on that loan.

When you receive your cash value, chances are good that you will have to pay income tax if the policy has been in effect for many years. That tax will generally be due on any amount you've ever received from the policy that is more than you paid in (also known as the policy's basis). For purposes of determining any tax due, the money received would include:

• Any cash value you receive when you cancel your policy
• Any existing policy loan
• Any unpaid loan interest
• Any dividends that you've taken in cash or used in any way other than to buy additional insurance
• Any money you've received through the surrender of insurance originally purchased with dividends

Remember, when you cancel your policy, it no longer exists and cannot be reinstated. At your death, no benefits will be paid. Also, you may not be able to get similar coverage again (because of your current age, medical condition, etc.).

Yes. You can terminate your policy, and receive the available cash value, the net worth of the policy, in various ways:

1. You can receive the cash value in a lump sum or
   
   
2. You can receive regular payments — monthly, for instance. Those regular payments may be scheduled for:
   
   
   • Your lifetime or your spouse's lifetime
   • A specified time, i.e., 10 years, etc
   • Other possibilities that include combinations of those.

In any case, the payment(s) you receive will be based on the net cash value of your policy at the time you terminate it. That's the cash value that remains after deducting the amount of any policy loan and unpaid interest.

The taxes due on payments you receive will depend on the arrangement you select. However, in most cases, at least a portion of the payments will be taxed. Because this money grew tax-deferred in the first place and is not being paid to a beneficiary, the taxes come due when the money is paid to you.

Caution: Terminating your policy is a serious and irreversible decision. If you would like to use money from your life insurance policy to provide retirement income but don't want to give up all of your insurance coverage, there are other options. These options take advantage of your policy's cash value but generally involve changes to your coverage and the possibility of taxes. To learn about other options and which might be best in your situation, talk to your Northwestern Mutual Financial Representative or someone in your local Network Office before you make this decision. Remember, there may well be more favorable options to use your permanent life insurance policy than terminating coverage altogether.

When you're considering tax issues related to whole life insurance, you should be aware that with certain policies and situations, the tax advantages are not the same as those discussed in other parts of this FAQ. Under rules of the Internal Revenue Service (IRS), certain life insurance policies may be classified as a Modified Endowment Contract (MEC). Here's why you should know about MECs.

In the 1980s, many people looking for ways to grow large sums of money with minimal taxes bought whole life insurance policies. These investors were more interested in accumulating wealth through the tax advantages of whole life insurance than in the death benefit. As a result, Congress stepped in and put limits on how much money can be contributed to a whole life insurance policy at the outset to ensure that it did not become more of an investment vehicle than an insurance policy.

Under the IRS rules, if the premiums you pay for your policy exceed a limit set by law (known as the "seven-pay limit"), your policy may be classified as a Modified Endowment Contract (MEC), and it will lose its tax-favorable treatment.

Tax attorneys and the IRS refer to this changed policy status as a MEC, a Modified Endowment Contract.

If you do something that would result in your policy becoming a MEC, you will receive a notice from Northwestern Mutual. This notice will explain how you can, within a certain time frame, reverse or prevent the MEC status. Your Northwestern Mutual Financial Representative or someone in your local Network Office can explain this situation more fully. In addition, you should consult a tax attorney to guide you in resolving this problem.

These are complicated issues and virtually impossible to discuss generally. Also, special rules may apply when ownership of a policy is transferred. Each policyowner's circumstances are different, prompting a variety of tax consequences and setting off a host of financial repercussions. To learn more, consult your Financial Representative and your tax attorney.

* Split-dollar is a funding arrangement that enables two individuals to share the cost of permanent life insurance premiums, and in so doing, also share in the death benefit — and in some instances, the cash value as well.

If you have a question that has not been answered in this FAQ, contact your Northwestern Mutual Financial Representative or your local Network Office.