Cash value life insurance: Benefits in 2024
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Updated 10:56 a.m. UTC Oct. 2, 2023
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When shopping for life insurance, you can typically choose between a term life insurance policy or a permanent life insurance policy. Permanent life insurance policies last a lifetime and commonly include a cash value component, or a savings or investment account. Life insurance that includes this cash value feature is known as cash value life insurance.
There are several types of permanent coverage that fall under the cash value life insurance umbrella. Here’s what you need to know.
Ethos
What is cash value life insurance?
Cash value life insurance is an umbrella term used to describe a life insurance policy that can build cash value over time. This only applies to permanent life insurance policies. Term life insurance policies don’t include a cash value component.
In a cash value account, your cash value will grow tax-free, and you can borrow against or withdraw from it while you’re alive. That makes it an attractive option if you want to provide financial protection for your loved ones after you die and have access to a cash reserve while you’re alive.
How does cash value life insurance work?
As you make your premium payments for a permanent life policy, some of that money goes toward keeping the policy active and paying policy fees. If the policy includes a cash value component, another portion of your premiums goes into that account, accumulating over time.
How your cash value grows depends on the type of policy you choose. Some policies offer a guaranteed rate of return, while other policies have a cash value that grows based on market performance and thus fluctuates over time.
The speed of growth also varies. Some cash value policies grow slowly, meaning you won’t see a meaningful balance for several years. Others may provide quicker growth up front.
You can access your cash value by withdrawing funds, taking a loan against the cash value account or by surrendering the life insurance policy. You can also use it to pay policy premiums.
Types of cash value life insurance
The most common types of cash value life insurance include the following.
Whole life insurance
Whole life insurance is a simple type of permanent life insurance that offers lifelong coverage, a guaranteed death benefit and premiums that won’t go up over the life of the policy. It also has a cash value account that grows at a minimum rate of return set by your insurer.
Universal life insurance
Universal life insurance is another common form of permanent life insurance that often includes a cash value. There are several types of universal life insurance, and cash value growth varies by type.
- Guaranteed universal life (GUL) insurance offers level premiums and a guaranteed death benefit. If a GUL policy has a cash value account, it’s typically minimal.
- Indexed universal life (IUL) insurance offers flexible premiums and death benefits that can be adjusted. It also has a cash value component that is tied to a market index, such as the S&P 500. These policies typically have a floor, or minimum amount that can be credited to the account, and a cap, or the maximum amount that can be credited to an account. However, the floor can be 0%, so earnings aren’t guaranteed.
- Variable universal life insurance (VUL) allows policyholders to determine how their cash value account is invested. If you have a VUL account, you can choose to invest in market sub-accounts, such as stocks and bonds. There are no floors or caps, which means you can see significant growths or losses depending on the market. This can make it a riskier option when compared to other universal life policies.
Variable life insurance
Variable life insurance offers a fixed death benefit, level premiums and a cash value. The cash value of a variable life insurance policy is based on the performance of sub-accounts, such as stocks and bonds.
You decide how to invest your cash value, giving you an active role in how your account grows. But the trade-off for more control is increased risk. If an investment performs poorly, you can see a falling cash value or even a decreased death benefit.
Guaranteed issue life insurance
As the name implies, guaranteed issue life insurance is coverage for which you’re “guaranteed” to qualify, regardless of health, as long as you’re within the minimum and maximum age requirements set by the insurer.
Guaranteed issue life insurance, or guaranteed acceptance life insurance, is a permanent life insurance policy with steady premiums. Death benefits are usually small, such as $25,000 or less. Sometimes these policies include a cash value, but they are also typically minimal.
4 ways to use your life insurance policy’s cash value
The cash value of your account is built off a portion of your premiums, so it usually takes years for the account balance to be significant enough to tap into. Once you have enough money in your account, you can typically access it using one of the following methods.
Take out a loan
Taking a loan out against the cash value portion of your life insurance policy is often easier and more affordable than taking out a traditional loan. Like a traditional loan, a loan against the cash value of your life insurance policy accrues interest until its repaid. Interest rates are set by your insurer, but it cannot exceed the maximum rate set by state law.
Cash value life insurance loans are not without risk, however. If you fail to repay the loan, your insurer will deduct the balance, plus interest, from your beneficiaries death benefit. Further, if loan interest accrues long enough, it can lead to a policy lapse.
Make a withdrawal
If you don’t want to worry about repaying a loan, you can simply withdraw money from your cash value account. If the amount is equal to or less than the amount you paid in premiums, it won’t be taxed. However, if your withdrawal exceeds the amount you paid in premiums, meaning it includes investment gains, it will be taxable.
Like a loan, a withdrawal will decrease your beneficiaries’ death benefit.
Use the cash value to pay premiums
Depending on the type of policy you have, you may be able to use your policy’s cash value to cover premiums. This can be a good option if you need to eliminate this expense from your budget. However, if you don’t keep track of your remaining cash value balance, you could wipe it out and your policy might lapse.
Surrender the policy
If you decide you no longer want or are unable to keep your life insurance policy active, you can surrender the policy. You’ll receive the cash value minus any fees or charges your insurer may apply. If you have a loan balance or unpaid premiums when you surrender, your insurer will also deduct these from your cash value.
Pros and cons of cash value life insurance
Cash value life insurance can be valuable to some, but it’s not the right tool for all. If you don’t need lifetime coverage, a cash value policy probably isn’t the best option, as other investment tools exist. Before you open a cash value life insurance policy, consider these pros and cons.
Pros
- Built-in savings or investing account funded by a portion of your premium.
- Option to borrow or withdraw cash value, per policy rules.
- Ability to use cash value to pay premiums, per policy rules.
- Grows tax-deferred and withdrawals from premiums (not gains) are tax-free.
Cons
- Takes time to accumulate cash value.
- Borrowing and withdrawing may decrease the death benefit.
- Cash value doesn’t go to your beneficiaries.
- You’ll pay interest on cash-value loans.
Ultimately, cash value is a living benefit. When you pass away, cash value typically reverts to the life insurance company.
A cash value life insurance policy may be worth considering if you want long-term coverage and the ability to access savings later in life. But if you don’t think you’ll need access to a cash value account during your lifetime, it may not be worth the higher premiums. Speaking to a financial advisor can help you determine how a cash value life insurance policy fits into your financial planning.
Cash value life insurance FAQs
No. Term life insurance does not have a cash value component. Term life policies provide a guaranteed death benefit with premiums and coverage locked in for a set number of years.
Cash value life insurance shouldn’t be your first investment choice — first maximize other savings options like IRAs and 401(k)s.
Life insurance with a cash value component could be worthwhile if you want to have the benefit of permanent coverage combined with the ability to access the accumulated cash value during your lifetime. But these policies aren’t right for everyone.
Cash value life insurance policies, such as whole life or universal life insurance, are more expensive than term life insurance, and you’re unlikely to see a significant cash value balance in the early years of your policy. In addition, your beneficiaries won’t get the cash value when you pass away.
If you’re looking for an investment that can benefit your loved ones after your death, cash value is not the tool for that.
Yes, you can typically use cash value to pay life insurance premiums, but this option won’t be available right away. It can take decades to build a substantial cash value.
Use caution if you decide to use cash value to pay your premiums. If you wipe out your cash value balance, your policy could lapse and your beneficiaries may not receive the death benefit.
Yes, you can typically borrow against the cash value as long as you have enough money in the account.
Cash value loans are often easier to get than personal loans through a traditional lender, don’t rely on credit scores and typically have lower interest rates when compared to other lending options.
If you don’t pay back a cash value loan before you die, however, your beneficiary will receive a reduced death benefit.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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