Cash Value Life Insurance: Explained

By Renata Balasco Updated June 3, 2021

Cash value life insurance

Cash value life insurance is a form of permanent life coverage that provides living benefits through accrued cash value. These living benefits can be accessed before the death of the insured. Commonly interchanged with whole life insurance, the term cash value life insurance serves as a general title for many types of permanent life insurance policies.

Let’s explore what exactly cash value life insurance is and whether such a policy is right for you.

Cash value life insurance defined

Cash value life insurance is an umbrella term used to describe a variety of permanent life insurance solutions, all of which allow policyholders to earn cash value throughout the life of their insurance policy. Cash value builds as you pay your premiums; a percentage of each premium payment is set aside as tax-deferred monies that accrue at the interest rate specified in your policy. Cash values are meant to be accessed while the policyholder is living and are considered separate from the policy's death benefit, which is paid out to beneficiaries upon the policy owner’s passing and free from income tax.

How does cash value life insurance work?

Think of cash value as an investment or savings account. It is intended to be spent while the policy owner is still living, and can be put towards a variety of uses. You can use cash value to pay the policy premiums, take out loans, or save as a retirement income supplement. It is also available to withdraw if you are in need of cash immediately and no longer need life insurance; cash value life insurance allows you to surrender the policy and cash out with your balance.

Types of cash value life insurance

There are several different types of life insurance policies you may choose from that build cash value. The most well-known is whole life insurance, but there are several others that might be more suitable for your situation.

Whole life: Whole life insurance is a form of permanent insurance that covers you for the duration of your life. While this type of policy is more expensive due to its permanence, it is attractive to those who wish to build cash values while paying level premiums throughout the life of the policy.
Universal life: Universal life insurance is another type of permanent policy. The main difference between universal and whole life policies is that the cash value is associated with a specific stock index instead of a fixed percentage. This leaves the cash value vulnerable to decline if the market underperforms.
Variable life: Variable life insurance provides death benefits and cash values that vary according to the investment returns of stock and bond funds. The policyholder can select from available funds, allowing the policyholder to be more or less aggressive.
Variable universal life: this is a type of universal life policy that allows the policyholder to select the investment risk. It may provide a minimum guaranteed death benefit, but most often there is no guarantee of death benefit or cash values.

Pros and cons of cash value life insurance

Much like other forms of insurance, cash value life insurance comes with its share of advantages and disadvantages. The bottom line is: cash value life insurance policies give opportunities for loan or investment needs, but are some of the more expensive forms of life insurance.

Pros and cons of cash value life insurance include the following:

Pros	Cons
Life insurance coverage lasts your entire life. Provides living benefits if needed. Cash values can be used for a variety of purposes, including supplement retirement income, loan collateral, or premium payments. Cash values are tax-deferred and interest is kept at a fixed rate. You may surrender the policy and cash out at any time.	It’s expensive: cash value policies often cost 5-10 times more than a term life insurance policy. It takes time to build up cash value: most growth happens once you’ve had the policy for 20+ years. If you surrender the policy early, you will likely not see any benefits as the cash value of your policy earned will be lesser than premiums paid. Cash value is not added to your death benefit. Only the policyholder can utilize cash values during his or her life. Taxes are deferred until withdrawal: once you cash out, earnings beyond your premiums will be taxed. Cash value has limited investment options and a low rate of return. A 401k or IRA may serve a greater benefit.

Pros

Cons

Life insurance coverage lasts your entire life.
Provides living benefits if needed.
Cash values can be used for a variety of purposes, including supplement retirement income, loan collateral, or premium payments.
Cash values are tax-deferred and interest is kept at a fixed rate.
You may surrender the policy and cash out at any time.

It’s expensive: cash value policies often cost 5-10 times more than a term life insurance policy.
It takes time to build up cash value: most growth happens once you’ve had the policy for 20+ years. If you surrender the policy early, you will likely not see any benefits as the cash value of your policy earned will be lesser than premiums paid.
Cash value is not added to your death benefit. Only the policyholder can utilize cash values during his or her life.
Taxes are deferred until withdrawal: once you cash out, earnings beyond your premiums will be taxed.
Cash value has limited investment options and a low rate of return. A 401k or IRA may serve a greater benefit.

Is a cash value policy worth it?

A cash value life insurance policy may be better suited for people in unique financial circumstances, but most people tend to opt for a lower-cost solution like term life insurance. Cash value policies are best for:

High-income earners who have exhausted other retirement accounts and are seeking additional savings
High net worth individuals who need a solution for tax-free inheritance for their children
People with special needs children who are at a higher risk of experiencing unexpected financial obligations.

If you are interested in using cash values during your lifetime and you’re willing and able to pay higher premiums, consider a cash value policy. Due to the high premiums and limited opportunities for which the cash value is usable, many applicants choose to enroll in a term policy and explore other options for investments or retirement funds, like a 401k or IRA.

For more information on which type of life insurance policy might be right for you, contact your insurance agent or consult with a variety of life insurance companies. Many of the larger auto and home insurers have expanded to offer life insurance options. The following carriers offer term and/or whole life insurance policies:

Allstate
AAA
State Farm
Progressive
Liberty Mutual
GEICO
Nationwide
Kemper
USAA
Metlife
Erie
Elephant
Chubb
Farmers
The General
Plymouth Rock
American Family
Safe auto
Amica
Lemonade

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Cash Value Life Insurance Explained