What is a cash value life insurance policy?

Cash value life insurance refers to a policy that includes a cash value component. It’s not a specific type of life insurance policy; rather, cash value is part of whole and universal life insurance. These policies are composed of two parts: the death benefit and a savings component called cash value.

"Most people are familiar with the death benefit, which is the amount paid to your beneficiaries upon your passing," says Alex Martinez, an insurance broker and co-owner of Old Oak Insurance Services.

The cash value account allows you to also set aside tax-deferred savings that earn modest returns. Depending on the type of policy, the interest rate may be fixed or be tied to investments that can fluctuate. Some can be quite risky.

Types of cash value life insurance policies

There are several types of life insurance policies with cash value, which accumulate savings in a variety of ways. Below is a closer look at the different types available.

Whole life insurance

The simplest form of permanent life insurance, whole life insurance policies allow you to set aside cash that grows at a conservative rate, which is determined by the life insurance company.

"They typically provide a slow, steady growth of 2-4% annually on your money," Martinez says.

The premium and death benefit amount both stay the same over time.

Universal life insurance

Universal life insurance works similarly to whole life, except that you have more flexibility in your payments. The cash value portion also grows at a rate similar to money markets.

The death benefit in a universal life policy is also flexible. However, these policies are complex, and it’s best to speak with a financial advisor before you buy one.

There are also a few variations of universal life, including:

  • Guaranteed universal life
  • Indexed universal life
  • Variable universal life

The main differences between these policies are how the cash value is invested and the level of risk.

How does cash value life insurance work?

When you pay your premium on a cash value life insurance policy, a portion goes toward funding the death benefit (what your beneficiaries receive when you die) and another portion goes to a sort of savings or investment account that earns interest. This is money you can access while the policy is active.

"One of the reasons some people buy cash value life insurance is the potential to access cash value for other needs or as a source of supplemental retirement income," says Marjorie Ma, head of product management for AIG Life U.S.

Your policy continues for life as long as you keep up on your premium payments, and the death benefit will be paid when you die. But what happens to the cash value in a whole life policy at death? Your heirs receive the death benefit, but any remaining cash value gets absorbed by the insurance company (unless you add a specific rider).

Who should consider cash value life insurance?

Cash value life insurance may be good for some people, but it’s important to look at how it stacks up against other investment options.

For most people, term life insurance policy (which has no cash value) may be the way to go. Investing the difference elsewhere is likely to bring a better return.

"Generally, I only advise clients to consider whole life or universal life if they have at least $500 a month to put into the policy and are looking at at least 20 years before they start taking money out," Martinez says. "This gives the policy time to accumulate a decent return and build a death benefit that makes sense for the amount paid in."

Is cash value life insurance a good investment?

What is a good investment for you depends on personal circumstances. As a general rule, you will see a better return on your investment with other options. There are a lot of alternatives to cash value life insurance to provide for your loved ones and also ensure your own financial future.

It’s important to review your options with a financial advisor and get advice specific to your needs.

How much is cash value life insurance?

The cost of cash value life insurance policies can vary by product type.

"The premium for a cash value policy can depend on how long you want to pay the premium and your health and age," Ma says.

The amount of the death benefit, your age when you buy the policy, and your health and lifestyle will all impact what you pay for life insurance. That makes it difficult to estimate costs. It’s best to request quotes and find out what the rates look like for you.

Best cash value life insurance companies

If you're shopping around for a cash value life insurance policy, there are dozens of companies to choose from. Insure.com ranked some of the best life insurance companies. Here are the top 12.

  1. State Farm
  2. Northwestern Mutual
  3. MassMutual
  4. New York Life
  5. Mutual of Omaha
  6. John Hancock
  7. Globe Life
  8. Prudential
  9. Transamerica
  10. Lincoln Financial Group
  11. AIG
  12. Brighthouse Financial

Pros and cons of cash value life insurance

Before deciding on whether to take out a cash value life insurance policy, it's important to weigh the pros and cons. Some important ones to consider include:

Pros:

  • There's a guaranteed death benefit.
  • The cash value portion grows tax-deferred.
  • It provides a low-interest and tax-free loan option.
  • You can access cash value during your lifetime and also use it to pay your premiums.

Cons:

  • Premiums are expensive compared to term life insurance.
  • You may have to qualify for a policy, which can mean undergoing a health exam.
  • It takes decades to build up cash value.
  • The cash value isn't typically added to the death benefit.
  • Earnings are limited compared to other investment options, such as the stock market.
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