What happens to cash value in a whole life policy when the policyholder passes away?

In a whole life insurance policy, when the policyholder passes away, the cash value component of the policy does not simply disappear. Instead, the cash value is generally paid out to the beneficiaries along with the death benefit. This means that the total financial security provided by the policy encompasses both the death benefit and the accumulated cash value, enhancing the overall value received by the beneficiaries.

This feature is significant because it illustrates the dual advantage of whole life policies: they not only provide a death benefit to protect loved ones financially in the event of the policyholder's death but also build cash value over time that can be beneficial for the insured during their lifetime, or ultimately passed on to beneficiaries.

Other options do not accurately reflect how cash value is handled upon the death of the policyholder. For instance, the cash value is not lost or forfeited, nor can it be unilaterally withdrawn by the insurance company, and it is also not simply refunded to the estate without consideration of the beneficiaries. Understanding this aspect of whole life insurance is critical for appreciating the benefits offered in these policies.