Cash Value Life Insurance: Is It Right for You?
The cash value in permanent life insurance policies can produce impressive returns, but it also comes with risks.
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If you’re in the market for a permanent policy, you may have come across the term “cash value.” It has a nice ring to it, but you’ll need to consider whether a cash value policy is worth the cost.
What is cash value life insurance?
Cash value life insurance is just another name for permanent life insurance. The phrase “cash value” refers to a savings component in different kinds of permanent life insurance, such as universal life and whole life insurance. When you pay your premium, part of your payment goes toward funding the policy's cash value.
That cash value earns interest over time at either a fixed or variable rate depending on the type of policy you have. Once you have enough cash value, you can begin to access that money in various ways.
Cash value life insurance: Key facts
Kinds of life insurance with cash value
Most permanent policies build cash value, including whole, universal, variable universal and indexed universal life insurance. How the cash value grows depends on the kind of policy you buy.
Whole life insurance
A whole life insurance policy guarantees a fixed rate of return on the cash value. Policyholders with mutual companies may earn additional dividends. You can take dividends as cash or use them in a variety of ways, including applying them to the policy’s cash value.
Some life insurers, specifically mutual life insurance companies, offer dividends based on their financial performance. Dividends are extra payments that may be given annually to whole life insurance policyholders. While not guaranteed, life insurers pay dividends when they take in more in premiums for the year than they pay out for death benefits and other costs.
Indexed universal life insurance
With indexed universal life insurance, the cash value growth is tied to a stock or bond index, such as the S&P 500. Growth rates may vary but the cash value can’t decrease past the policy’s floor, which is usually set at 0%.
Variable universal life insurance
With variable universal life, the cash value is invested in various subaccounts of stocks, bonds or mutual funds. This kind of policy offers the greatest potential returns but comes with the risk of losing cash value if the investments tank.
Did you know…
Term life insurance doesn’t have a cash value component, so you can’t borrow against the policy. It provides temporary coverage for a certain period, such as 10, 20 or 30 years, and pays out if you die within the term. That’s why it’s so affordable, especially for young and healthy people. In general, term life is sufficient for most people.
» Need term life insurance? Compare life insurance quotes
Compare how permanent life insurance builds cash value
Here’s a snapshot of how different types of permanent life insurance build cash value over time.
Type of permanent life insurance | Fixed or variable | How it builds cash value |
|---|---|---|
Whole life insurance | Fixed | Fixed rate of return, mutual companies may pay dividends |
Indexed universal life insurance | Variable | Cash value is tied to stock or bond index |
Variable universal life insurance | Variable | Cash value is tied to the performance of subaccounts of stocks, bonds, or mutual funds |
What you can do with the cash value of an insurance policy
The cash value is a big selling point that insurance agents highlight about permanent life insurance. Here’s what you can do with the cash value of a life insurance policy.
Withdraw all the cash value and surrender the policy
This will end the life insurance coverage. In the early years, you’ll likely have to pay a surrender fee to the insurance company.
Make partial withdrawals
If you’re not prepared to give up your coverage, you can withdraw part of your cash value. But any money you choose not to repay will reduce the life insurance death benefit — the payment to the beneficiary when you die.
Borrow against the cash value
You can take out loans for anything you’d like. You’ll have to repay them, though, with interest. If you don’t, the insurer will subtract the outstanding loan amount from the death benefit.
Use it to pay premiums or the cost of insurance
Once the cash value is high enough, you might be able to funnel the money toward your whole life insurance policy premiums. For other permanent policies, you can use the cash to cover the cost of maintaining your policy.
Note that it can take years to build up enough cash value to start accessing the money within your policy.
Pros and cons of cash value life insurance
Cash value life insurance has some advantages, including lifelong coverage and the ability to earn cash value you can borrow. But it comes with some downsides, too.
Pros | Cons |
|---|---|
Policies earn money that can be withdrawn or borrowed against during your lifetime. | Cash value policies tend to have higher premiums than term life insurance. |
Policies typically last your lifetime. | Managing policies often requires a hands-on approach. |
Cash value loans have relatively low net interest rates. | Unpaid loans can reduce the death benefit paid to your beneficiaries. |
» MORE: Average life insurance rates
Is cash value life insurance right for you?
Your decision to buy a cash value life insurance policy will depend on how much risk you want and how much flexibility you need.
A whole life policy is the most straightforward permanent life insurance option. The annual premium you pay, the death benefit and the base return on cash value are all guaranteed.
Universal life insurance lets you adjust your premiums and the coverage amount, within limits. The different types of universal life offer varying levels of risk when it comes to cash value growth.
If you need temporary, low-cost coverage that’s simple, you may want to consider a term life policy instead of cash value life insurance.
You’ll generally need a trusted life insurance agent to walk you through your permanent policy options. It’s also a good idea to get a second opinion from a fee-only life insurance advisor to see whether cash value life insurance is the right type of policy for you.
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