What Is Cash Value Life Insurance?

What Is Cash Value Life Insurance?

Unlike term life insurance, which usually lasts up to 30 years, cash value life insurance policies last the policyholder's whole life (or until age 99, depending on the policy details). As with any type of life insurance, you pay premiums on a policy, and the insurance company pays a death benefit to your beneficiary if you die with the policy in force.

With a cash value life insurance policy, part of your premium payment is placed in a cash value account that earns tax-deferred interest. Depending on the policy, the cash value could eventually equal the policy's face value (the death benefit).

Like all life insurance, cash value life insurance is primarily designed to benefit your loved ones after you die. With cash value life insurance, however, you can also access its accrued value while you're alive once your account balance reaches a certain amount. You may be able to:

• Use the cash balance to pay the premiums, which lowers your expenses while keeping your policy active.
• Withdraw part of the money from the cash account for expenses such as a financial emergency or a child's wedding. Withdrawals will reduce your death benefit, and there may be tax consequences if you take out more money than you paid in premiums.
• Borrow against the cash value in your account. If you die without repaying the money, any outstanding loan balance will be deducted from the death benefit.
• Surrender, or cancel, your policy and receive its cash surrender value. which may be all or part of the cash value. You may want to do this if your beneficiary no longer needs the income from the death benefit.

Learn more: How to Borrow Money From Your Life Insurance Policy

How Does Cash Value Life Insurance Work?

Cash value life insurance puts a portion of your premiums into a savings account that builds cash value over time. Several forms of permanent life insurance offer cash value, but there are important differences among them.

• Whole life insurance is the simplest type of cash value life insurance. Its cash value grows at a guaranteed interest rate; some policies pay dividends, which can increase the cash value.
• Universal life insurance (UL) has a cash value account that earns guaranteed interest, typically at the same rate as a money market account. It's sometimes called adjustable life because you can adjust your premiums and death benefit once you accrue a certain amount of cash.
• Indexed universal life insurance (IUL) is a type of universal life with a cash value interest rate that rises or falls with the performance of a market index, such as the S&P 500. An IUL policy offers greater potential for growth plus a guaranteed minimum interest rate, which helps reduce your risk.
• Variable life insurance gives you the option to invest your policy's cash value in stocks, bonds or money market mutual funds. This type of insurance can be risky: If your investments perform poorly, your cash value or death benefit can decrease, or your policy could be canceled.
• Variable universal life insurance (VUL) combines the features of universal and variable life insurance. There's greater flexibility and growth potential, but also more risk than with UL or UIL.

Learn more: What Are the Different Types of Life Insurance?

Pros and Cons of Cash Value Life Insurance

Cash value life insurance has benefits and downsides that you should carefully consider before buying a policy.

Learn more: How Much Life Insurance Do I Need?

Should You Get Cash Value Life Insurance?

Given its cost and complexity, cash value life insurance isn't for everybody. Cash value life insurance may be a fit for you if:

• You've already maxed out your retirement savings. If savings vehicles such as your 401(k) and IRA are fully funded, cash value life insurance can provide additional financial resources in retirement.
• You have a lifetime dependent, such as a special needs child, and want to maintain insurance coverage as you age to protect them financially.
• You can afford it. Cash value life insurance is typically used in estate planning for high earners.
• You're comfortable with complex financial products. Particularly with universal life policies and their variants, it's important to understand the risks of cash value life insurance.

Cash value life insurance probably isn't for you if:

• You're on a tight budget. If you can't pay your premiums, your coverage will lapse. Term life insurance is much more affordable, making it a better fit for most people.
• You don't need lifetime coverage. Term life insurance can protect your loved ones for up to 30 years. By then, you may not need life insurance if your children are independent and your spouse can tap retirement income to cover expenses.
• Retirement savings are a priority. You'll generally earn higher returns from retirement plans and investments than from a cash value life insurance policy.

Learn more: Which Is Better: Term or Whole Life Insurance?

How to Get Cash Value Life Insurance

If you decide cash value life insurance makes sense for you, here's how to buy a policy.

1. Decide how much coverage you need. Add up your liquid after-tax assets and subtract your monthly household expenses, estimated final expenses, and your family's current and future financial needs from that amount.
2. Determine the right type of cash value life insurance. You may want a simpler policy, such as whole life, or a more complicated option, such as variable universal life.
3. Get several quotes. Cash value life insurance is complex, so it can be helpful to work with an independent insurance agent. They sell policies from multiple insurers and can explain the ins and outs of various policies.
4. Complete an application. You'll typically need to provide personal, health and financial information. A medical exam and phone interview may also be required.
5. Purchase the policy. Once your application is approved, carefully review the policy terms and coverage. Sign the contract and pay your first premium to initiate coverage.

Tip: When calculating your liquid assets, be sure to include pensions, Social Security survivor's benefits and other life insurance policies.

Alternatives to Cash Value Life Insurance

If cash value life insurance isn't a good fit for you, consider these simpler and more affordable types of life insurance.

• Term life insurance is purchased for a set term, such as 20 or 30 years. Premiums are much more affordable than for cash value life insurance and generally stay the same throughout the term. Term life insurance policies don't accrue cash value, but do pay a death benefit if you die while the policy is active. Once the policy term ends, you may have the option to renew your coverage or may need to buy a new policy if you want continued coverage.
• Group life insurance may be offered as an employee benefit; your employer may pay all or part of the premiums. It typically provides limited coverage while you work at the company, often with the option to buy more. Group life insurance coverage usually ends when you leave your job, although some plans offer the option to continue coverage.
• Final expense insurance is designed to pay end-of-life expenses, such as burial costs. However, beneficiaries can use the payout for anything they want. Death benefits usually range from $5,000 to $25,000, with premiums of a few dollars a week.
• No-exam life insurance, unlike most types of life insurance, requires no medical exam. You generally need to answer questions about your medical history and the insurer may also check your medical records. Coverage can range from $25,000 to $1 million.

Learn more: Is Life Insurance Worth It?

Frequently Asked Questions

The Bottom Line

Life insurance is meant to replace your income after your death, providing a financial safety net for your surviving family. Cash value life insurance offers the extra benefit of accruing wealth to provide a financial cushion for you.

Cash value life insurance isn't right for everyone, but if loved ones rely on your income, exploring life insurance options should be part of your estate planning process. Since good credit is key to your family's financial future, protecting your credit is important too. Consider signing up for free credit monitoring from Experian. It's a convenient way to keep tabs on your credit and get alert to important changes that could signal fraud.