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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Updated · 2 min read
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Written by 
Managing Editor
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Life insurance expert
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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

Bills with coin.
CostsMore expensive than term life insurance
Paper documents wrapped with a ribbon that has a checkmark on it.
Benefits Lifelong coverage and cash value you can borrow against or withdraw
A person looking at a mobile phone.
Who it's forThose who want longer-term coverage or to provide for estate taxes

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.

🤓Nerdy Tip

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.

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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