What is Cash Value Insurance – Is it a good investment?

Cash value life insurance has been available for nearly 200 years. Over time, individuals and businesses have used this type of policy to not only provide for their loved ones in case of death, but also to accumulate tax-advantaged savings, pay for a college education, purchase a new home, and supplement future retirement income needs.

Cash Value Life Insurance Definition

Cash value life insurance, which is also known as permanent life insurance, is a type of policy that offers both a death benefit and the ability to build up savings or investments. The cash in the policy is able to grow tax-deferred, meaning that there is no tax due on the gain unless or until it is withdrawn by the policy holder.

Unlike term life insurance, which has an “expiration date,” cash value life insurance will usually remain in force, provided that the premium is paid. This is the case, even if the insured contracts an adverse health condition. Term life insurance does not build cash value.

Pros and Cons: Is Cash Value Life Insurance a Good Investment?

While it is technically not an investment per se, cash value life insurance can provide a long list of financial benefits – and it can do so in a tax-advantaged manner. For instance, because the money inside of a permanent life insurance policy is allowed to grow tax-deferred, it can build exponentially over time.

In some cases, such as with variable life insurance, there is the risk of loss due to poor market performance. In other cases, like with whole life or universal life insurance, there is no risk to the cash – regardless of what happens in the stock market. Because there is no loss to make up for, the cash can continue to build up over time.

The cash in a permanent life insurance policy can be surrendered, withdrawn, and borrowed by the policyholder. If the policy is surrendered, tax will be owed on the gain. However, you can access money from the policy tax-free via a policy loan and withdrawal. This can provide an excellent way to secure tax-free retirement income.

One perceived “drawback” of cash value life insurance is that the cost is higher than that of comparable term life insurance coverage. But, while this is typically the case at the time of application (especially if the insured is young and in good health), term insurance can actually become much costlier down the road. That’s because, once the coverage expires, the insured may need to re-qualify, based on his or her then-current age and health condition.

Pros Cons
Coverage locked in (provided that premium is paid) More expensive than term life insurance (at least initially)
Premium won’t increase Cash value may grow very slowly
Accumulates cash value Interest accumulates on unpaid cash value loan balance
Cash grows on a tax-deferred basis Borrowing too much can cause the policy to lapse
Cash can be accessed for various needs

Types of Cash Value Life Insurance Policies

No type of life insurance policy generates immediate cash value. Cash value grows over time and at a steady pace. The best type of policy to maximize cash accumulation is an index universal life insurance policy.

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Whole Life Insurance

Whole life insurance is a type of permanent coverage that is intended to remain in force for the entire (or whole) life of the insured. This is the most simple form of permanent life insurance. It offers a fixed death benefit and a fixed premium, and the interest rate for the cash value growth is set by the insurance company

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Universal Life Insurance

Universal life insurance, or UL, has been described as offering the low-cost death benefit of term life insurance with a cash value component like whole life insurance. With these types of policies, there is a great deal of flexibility afforded to the policy holder. For example, those who own universal life insurance are allowed to change, within limits, their death benefit, as well as the timing and the amount of their premium payments. Each time that a premium payment is made, the insurance company will deduct a certain amount to cover the cost of the insurance while at the same time crediting another portion of the payment to the policy’s cash value account.

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Variable Universal Life Insurance

Variable universal life insurance is similar to regular universal life, except that the policy holder is allowed to invest the cash portion of the policy into different types of investments, such as mutual funds.

Index Universal Life Insurance

Indexed universal life insurance has both death benefit coverage and a cash value component. The return on the cash is based in large part on the performance of an underlying market index, such as the S&P 500. When the index rises, a positive return is credited – oftentimes up to a stated “cap,” or maximum. But, if the index performs poorly, the return on the policy’s cash value does not incur a loss, but rather is credited with a 0% for that time period.

Policy Types How Cash Grows
Whole Life Dividends from the insurance company
Universal Life Set interest rate from the insurance company
Index Universal Life Tracks and index such as the S&P 500
Varaiable Universal Life Tracks a mutual find like investment

How to Withdraw the Cash Value from a Life Insurance Policy

There are several ways to withdraw cash from a life insurance policy.

Loans

Money from a cash value life insurance policy can be borrowed. In this case, interest will continue to be credited to the account as if the full amount still remained. Borrowing cash can allow you to access funds tax-free.

It is important to note, though, that while the money is not required to be repaid, interest will typically still accrue on the unpaid balance. And, if the insured should die before the loan has been repaid, the insurance company will retain the difference from the death benefit that is paid out to the beneficiary.

Withdrawals

Cash value withdrawals can be made from a permanent life insurance policy. In this case, any amount of the withdrawal that is more than the amount of the premium paid in will be taxed to the policy holder.

Surrender

There is also the option of surrendering a life insurance policy. In this case, the policy will be canceled, and the cash value paid out. If the amount of cash exceeds the amount of paid-in premium, the overage will be taxable.

Getting the Best Cash Value Life Insurance Quotes

You can not get a cash value life insurance quote online.  Each carrier has there own software where the quotes must be run and they include an illustration with each quote.

There are many insurance carriers that offer cash value life insurance. But rather than going directly to a particular insurer, it is generally best to instead work with an independent insurance agent like us so that you can shop and compare coverage and premium prices. From there, you can more easily determine which option is best for you.

At Insurance Geek, we work with more than 40 top rated life insurance companies. So, we can work with you to find the right plan for your particular needs – and your budget. We’ve already done all of the shopping for you. So, if you’re ready to see your cash value life insurance possibilities contact us for an illustration today.