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Cash Value Life Insurance: Is It Right for You?

The cash value in permanent life insurance policies can generate impressive returns, but it also comes with risks.
Sept. 11, 2020
Insurance, Life Insurance
Cash Value Life Insurance: Is It Right for You?
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“Cash value” has a nice ring to it when you’re thinking about buying life insurance, but you’ll need to do some careful analysis to learn whether a cash value policy is worth the cost.

What is cash value life insurance?

The phrase “cash value” refers to a savings component of permanent life insurance policies, such as universal life or whole life insurance. A portion of your insurance premium — the price you pay for the policy — funds the cash value account, which grows over time.

Unlike the policy’s death benefit, which pays out to the beneficiary after the insured person dies, the money in cash value accounts is available to policyholders while they’re still alive.

Does term life insurance have cash value?

Term life insurance provides temporary coverage for a certain period, such as 10, 20 or 30 years, and has no cash value. You can’t borrow against a term life policy or cash it in for money. The only time it pays out is if you die within the term. That’s why it’s so affordable, especially for young and healthy people.

» MORE: Compare life insurance quotes

Advantages of cash value life insurance

Cash value is a benefit that insurance agents emphasize when selling permanent life insurance. Here’s what you can do with the cash value in a life insurance policy:

  • Make partial withdrawals. If the money is not repaid, the withdrawals will reduce the policy’s death benefit.
  • Borrow against the cash value. You can take out loans for anything you’d like. You’ll have to repay them, though, with interest, to maintain the death benefit.
  • Surrender the life insurance policy for the cash value. This will end your coverage, and you may have to pay a surrender fee to the insurance company. The cash surrender value of life insurance is based on the type of policy and how long you’ve had it.
  • Use it to pay premiums once the cash value reaches a high enough level.

» MORE: How to get cash from your life insurance policy

Types of cash value life insurance

How the cash value grows depends on the kind of permanent life insurance policy you buy.

  • Whole life insurance cash value has a guaranteed fixed rate of return. A whole life policy is the most straightforward kind of permanent life insurance because everything is fixed and guaranteed — the premiums, the death benefit and the return on cash value.
  • Universal life insurance ties cash value growth to investments, such as bonds and stocks. These policies allow you to adjust your premium and coverage amount.
  • Indexed universal life is a type of universal life insurance that links cash value growth specifically to a stock index, such as the Standard & Poor’s 500.
  • Variable life and variable universal life allow the policyholder to invest in various accounts of stocks, bonds or mutual funds. These types of policies offer the greatest potential returns, but they come with the risk that you could lose cash value if the investments tank.

Is cash value life insurance right for you?

Your decision to buy a life insurance policy with a cash value component will depend on how much risk you want to assume and how much flexibility you want to have. For example, the different types of universal life insurance offer varying levels of risk and potential for gains for the cash value.

You should also consider how involved you want to be with your policy. Cash value life insurance is more complicated than term life. You’ll need a trusted life insurance agent to walk you through the options. It’s also a good idea to get a second opinion from a fee-only financial advisor to see whether this type of insurance is right for you.

Term life insurance is sufficient for most young families. Financial planners don’t recommend using life insurance as an investment vehicle unless you’ve maxed out contributions to tax-advantaged retirement accounts, such as IRAs and 401(k)s, have saved for emergencies and other pressing needs, and are able to commit to a policy for the long term. Even then, it’s prudent to approach these policies carefully and make sure you understand what you’re buying.

» MORE: How much life insurance do I need?