What is cash value life insurance?

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Cash value life insurance is often a component of permanent life insurance policies. Cash value life insurance acts as a dedicated savings or investment account that earns interest. You can typically pull from a cash value account throughout your life through withdrawals or loans.

If you’re interested in getting cash value life insurance, we explain what it is, how it works and what policy types exist.

How does cash value life insurance work?

Cash value life insurance has a death benefit portion that works the same as any other life insurance policy. This death benefit is paid out to your beneficiaries upon your death.

However, the cash value component operates differently. Each month you pay your premium, and a portion of your payment is diverted into a separate savings or investment account. You can spend this money through withdrawing funds, taking out a loan, surrendering the policy or even using the money to pay your premiums.

The money you pay into your policy funds the following categories:

  • Cost of the insurance: Every month, part of your premium will go toward the death benefit that will be paid out upon your death.
  • Overhead and fees: You’ll also pay money towards the insurance company’s operating costs and you’ll pay fees associated with your cash-value account, just like with any other investment account.
  • Cash value: Some of the money will be diverted into the savings or investment account associated with your cash value policy.

Types of cash value life insurance

If you’re looking for a cash value account to augment your life insurance policy, you may be wondering what policy types you can choose. Thankfully, you can get cash value life insurance with several policy types.

  • Whole
  • Variable
  • Universal
  • Variable universal
  • Indexed universal

Learn the differences so you can pick the best choice for you.

Whole life insurance

With a whole life insurance cash value policy, your premium stays the same for the rest of your life. A small percentage of your premium goes into a savings account that accumulates interest. The rate of return on this account will vary with each company but usually sits around two percent. Typically, you can use funds from this account prior to death.

Variable life insurance

Unlike whole life insurance, variable life insurance allows you to choose how your accumulated cash is invested. Instead of having it sit in a savings account, you have a few more choices. For example, you can invest it in stocks or bonds.

There are two cons with this type, however. First, you have to know what you’re doing, and variable life insurance has higher fees than whole and universal cash value life insurance.

Universal life insurance

With universal life insurance, you have some control over what you pay for your premium. For instance, if you have a good month, you could overpay what you normally would and have the surplus go into your savings account. Likewise, if one month you’re a little short, you can use your savings account to pay your monthly premium.

To complicate matters even further, there are three types of universal life insurance. They are guaranteed universal life, indexed universal life and variable universal life. Which type you choose changes how your money builds up month to month.

Variable universal life insurance

With variable universal life insurance, part of your monthly premium will go into an investment account. The premium you pay is flexible meaning you can divert more money each month into this account if you choose. Keep in mind, however, that these policies usually have a cap and floor on the returns that you can receive.

Indexed universal life insurance

Along with a death benefit, indexed universal life insurance policies allow you to put as much money as you choose into a fixed account or an equity-indexed investment account that can earn interest.

How to use the cash value from your life insurance

If you’d like to use your cash value account prior to your death, you can do so in the following ways.

  • Make a partial withdrawal: You can withdraw money straight out of your cash-value account, but there’s a catch: when you do, the amount of money your beneficiaries receive when you die decreases. Even though it’s money that you deposited, if you use it, your life insurance policy goes down.
  • Take out a loan: You can take out a loan against the cash value you’ve built up. However, consider this: You’re going into debt over money that’s yours, and you’re paying interest on top of it. Should you be unable to pay it back before you die, your death benefit to your family will decrease.
  • Pay your premium: Use any amount of money you’ve accumulated to pay for your monthly premium. Depending on which life insurance company you work with, there may be a withdrawal fee to do so.
  • Sell your policy: Once all of your children have grown up or you don’t feel as if there is a need to have life insurance anymore, you can sell your policy for a cash settlement. The agent who set you up with your insurance will receive a cut from your settlement.
  • Surrender your policy: Instead of selling your policy, you can instead surrender it. Any cash value you’ve built up over the years will be given to you after numerous fees are taken out. If the cash value is more than you’ve paid in premiums over the years (which is unlikely), you’ll be taxed on any profits you’ve made.

Pros and cons of cash value life insurance

Pros Cons
You can spend from your cash value account while you’re alive. You have to pay fees associated with your cash value account.
You can earn interest on a cash value savings account. Your returns are capped at a certain amount.
You can earn returns on a cash value investment account. If you remove money from your cash value account, your death benefit decreases.
You can overpay on your premium and divert more money into your cash value account

Pros

Cash value life insurance can be great for people who want coverage more than just the death benefit that most insurance policies provide. With cash value insurance, you have the ability to earn interest or returns on your money. Typically, you can also withdraw some or all of your money before your death.

Cons

Cash value accounts typically cap your returns. These accounts often come with high fees and your death benefit will decrease if you remove money from the account prior to death. For these reasons, some folks may be better off investing their money in mutual funds separate from their life insurance policy to avoid these repercussions.

Frequently asked questions

What happens to the life insurance cash value when you die?

When you die, your family doesn’t receive any of the cash value you’ve accumulated over the years. Instead, all of the money is taken by the insurance company.

Can I withdraw cash value from life insurance?

Yes, you can get a portion of your cash from your cash value savings account. Should you withdraw more money than you’ve put in— meaning you withdraw an amount that includes any gains you’ve made— that money will be taxed at whatever income rate you have. Plus, your death benefit will then be reduced by whatever amount you withdraw (whether you dip into gains or not).

Do you have to pay back a cash-value withdrawal?

If you don’t want your death benefits to decrease, you have to pay back any amount you withdraw. If you’re fine with your death benefits decreasing, you can withdraw any amount you’ve put into your cash value savings account.

Does guaranteed issue life insurance have a cash value?

Yes, guaranteed issue life insurance policies have tax-deferred savings accounts that accumulate interest.