What is Cash Value Life Insurance?

Check out what cash life insurance is and how it can financially protect the ones you love.

WRITTEN BY
Priya Correia
Updated October 19, 2020

Having an insurance policy in place can provide your family with financial assistance in the event that you pass away. This is especially important if you still have a mortgage to pay and children in the house who depend on you to cover life’s biggest expenses. 

But there are many different types of life insurance policies available, including those that serve as a form of investment. In particular, cash value insurance policies not only feature a death benefit component that is paid out to your named beneficiaries but also a cash value component that is invested and brings in a specific rate of return. In essence, these policies can serve as both an insurance policy and a wealth-building investment vehicle.

Let’s dig a little deeper into cash life insurance policies to help you determine if this is the right type of insurance product for you.

What is Cash Value Life Insurance?

Cash value life insurance is a type of permanent life insurance that covers you for your entire life. It features both a death benefit component and a cash value component. As such, this type of policy can serve as a form of savings account. The value of the policy will depend on the exact type of policy you buy and what the rate of return is. 

You can use this policy to borrow against once you have accumulated enough cash value. Otherwise, you can use the funds withdrawn to pay for large expenses, save for retirement, or even put toward your premiums. You may also cash in the policy and surrender it. 

Types of Life Insurance With Cash Value

There are a few variations of a cash value life insurance policy, including the following:

Whole life insurance. This is the most basic type of permanent life insurance that is guaranteed to remain in effect for your entire life. The cash value component of this policy increases at a fixed rate of return.

Universal life insurance. Also lasting your entire life, a universal life insurance policy features a savings account within it that is tied to a stock index and earns interest according to the current market rate. Considering this, the returns typically fluctuate over time.

Variable life insurance. Variable life insurance features a portfolio of stocks, bonds and mutual funds that are chosen based on your appetite for risk. The cash value is invested into these accounts and are managed by your insurance provider. While variable life insurance offers the highest potential ROI, it’s also the riskiest. 

Variable universal life insurance. This insurance policy is a hybrid of both universal and variable life insurance and features flexible premiums. The cash value of the policy can be invested in an investment portfolio, and your coverage can be adjusted as required.

How Does Cash Value Life Insurance Work?

Every time you pay your premiums, the funds are divided and put toward both your death benefit and the cash value of the policy. Whatever goes toward the cash value is put in an investment account that grows tax-deferred. 

During the first few years, a bigger portion of the premiums goes toward the cash value. And in the later years, a larger percentage goes towards your death benefit, since the cost of insurance will go up as you get older.

Thanks to both components, a cash value life insurance policy can help you both protect your loved ones through a death benefit while helping you build wealth over time. 

Pros and Cons of Cash Value Life Insurance 

Pros 

  • Death benefit. As long as you keep up with your premiums, your beneficiaries will always be financially protected when you pass away. 
  • Fixed premiums. The premiums you pay will stay the same as long as the policy is in effect, making payments predictable and easy to fit into your budget. 
  • Cash value may cover premiums. Depending on how much your cash value grows and what you decide to use the earnings for, the accumulated cash value may eventually be high enough to cover the premiums.
  • Asset. Your policy’s cash value will grow over time as you pay your premiums, which can be used in the future for other expenses or to cash out.
  • Dividend payouts. Some cash value life insurance policies pay dividends, which can act as a type of regular income. 
  • Tax perks. The cash value of your policy will grow tax-deferred.

Cons

  • Higher premiums. Cash value life insurance policies usually have higher premiums compared to term insurance with the same death benefit amount. 
  • Complex. These types of policies are more complex than other straightforward policies like basic whole life insurance or term life insurance policies.

Calculating Your Life Insurance Expected Cash Value

If you want to know what the cash value of your life insurance policy is, or the amount of money that you’ll get if you cash out the policy, you will need to determine the cash surrender value. This is the cash value of the accumulated investment portion of your policy, which you will receive if you cancel your policy. 

It’s important to remember that your beneficiaries will no longer receive the death benefit if you cash out. Instead, you will obtain the cash surrender value of your policy.

Accumulating cash value in a life insurance policy takes place over time. The longer the policy is in effect and your premiums are paid, the more your money can grow. The amount you have paid into your policy, how the market has performed since your policy took effect, and how much your insurance provider charges in fees will determine the cash value of your policy.

Your insurance provider will be able to tell you what the exact cash surrender value of your policy is. 

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Ways to Access Your Cash Value

There are a handful of ways to access the cash value component of your policy:

Borrow against it. Like a conventional loan, you can borrow against the cash value of your life insurance policy. This can be especially useful if you have a poor credit score and are unable to secure a traditional personal loan. In this case, you can borrow against the cash value of your policy like a regular loan. This scenario makes more sense if your policy has a high cash value and you have a lucrative investment opportunity to take advantage of. 

Get paid in dividends. You may have the option to have your cash value policy pay you dividends from the earnings your investment makes. If your insurance provider pays a dividend to policyholders – which is money left over from the premiums collected – you can tap into your cash value this way. 

Transfer it to the death benefit. If you are approaching retirement and have a very high cash value attached to your life insurance, you may want to consider trading the cash value to boost your death benefit. By doing so, your beneficiaries will receive a bigger benefit. 

Surrender your policy. Your last option would be to cash out your policy and surrender it. After your policy has accumulated enough cash value, it can be cancelled and the surrender value can be taken in a cash payment. It should be noted that if you surrender the policy, you will no longer be insured. 

Final Thoughts

With a life insurance policy in place, you can rest assured knowing that your loved ones are financially protected in the event of your death. And with cash value life insurance, you can use your policy as an investment as well to help you grow your wealth.