Cash value life insurance

Cash value life insurance is a type of permanent life insurance that offers living benefits through the accumulation of cash value. These living benefits are available prior to the insured's death. The term cash value life insurance, which is often used interchangeably with whole life insurance, is a catch-all word for many different forms of permanent life insurance plans.

Let's take a look at what cash value life insurance is and whether it's good for you.

Defined cash value life insurance

Cash value life insurance is an umbrella phrase for a number of permanent life insurance options that all allow policyholders to accumulate cash value over the life of their insurance policy. As you pay your premiums, cash value accumulates; a percentage of each premium payment is set aside as tax-deferred monies that accrue at the interest rate stipulated in your policy. Cash values are intended to be accessed while the policyholder is still alive and are considered independent from the policy's death benefit, which is given to beneficiaries following the policy owner's death and is tax-free.

How does cash value life insurance work?

Consider cash value to be an investment or savings account. It is meant to be spent while the policyholder is still alive and can be used for a variety of purposes. Cash value can be used to pay policy premiums, make loans, or save as a retirement income supplement. It is also available for withdrawal if you need money right now and no longer want life insurance; cash value life insurance allows you to surrender the policy and cash out your amount.

Types of cash value life insurance

There are numerous types of life insurance policies that build cash value that you can choose from. Whole life insurance is the most well-known, but there are other alternatives that may be more appropriate for your condition.

  • Whole life: Whole life insurance is a type of permanent insurance that covers you for the rest of your life. While this form of policy is more expensive because it is permanent, it is appealing to individuals who want to accumulate cash values while paying level premiums for the duration of the policy. 
  • Universal life: Universal life insurance is yet another sort of permanent policy. The primary difference between universal and whole life insurance is that the cash value is linked to a specific stock index rather than a preset percentage. As a result, if the market underperforms, the cash value is liable to fall.
  • Variable life: Variable life insurance provides death benefits and cash values that fluctuate based on the investment performance of stock and bond funds. The policyholder can choose between available funds, allowing him or her to be more or less aggressive.
  • Variable universal life insurance: This is a form of universal life insurance policy that allows the policyholder to choose the investment risk. It may give a minimum guaranteed death benefit, but it is not always guaranteed in terms of death benefit or cash values.

Pros and cons of cash value life insurance

Cash value life insurance, like other types of insurance, has its perks and cons. To summarize, cash value life insurance policies provide chances for loan or investment needs, but they are among the more expensive types of life insurance.

The following are some of the Pros and cons of cash value life insurance:

Pros

Cons

  • Life insurance covers you for the rest of your life.
  • If necessary, provide living benefits.
  • Cash values can be used to supplement retirement income, as loan collateral, or to make premium payments, among other things.
  • The cash value is tax-deferred, and the interest rate is fixed.
  • You can pay out and surrender the policy at any moment.
  • It's pricey: cash value policies are frequently 5-10 times more expensive than term life insurance plans.
  • It takes time to build up cash value: the majority of growth occurs after you've had the policy for 20 years or more. If you surrender the policy early, you will most likely not receive any benefits because the cash value earned is less than the premiums paid.
  • Your death benefit does not include any cash value. Only the policyholder has access to cash values throughout his or her life.
  • Taxes are deferred until withdrawal: once you cash out, earnings beyond your premiums will be taxed. 
  • Cash value investment possibilities are restricted, and the rate of return is poor. A 401k or IRA may be more beneficial.

 

Is a cash value policy worth it?

A cash value life insurance policy may be better suited for persons with unusual financial circumstances, but the majority of individuals prefer a lower-cost option like term life insurance. Cash value policies are ideal for the following situations:

  • High-income workers who have depleted their other retirement accounts and are looking for new ways to save
  • Individuals with a high net worth who require a solution for tax-free inheritance for their children
  • People with special needs children are more likely to face unexpected financial responsibilities.

Consider a cash value policy if you want to use cash values during your lifetime and are willing and able to pay higher premiums. Because of the expensive premiums and limited chances for which the cash value is accessible, many applicants opt for a term insurance and look into other possibilities for investments or retirement money, such as a 401k or IRA.

Contact your insurance agent or consult with a number of life insurance providers for further information on which sort of life insurance coverage is best for you. Many of the biggest auto and home insurers have expanded their product offerings to include life insurance. The following companies provide term and/or whole life insurance: