What is Cash Value Life 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
What is cash value life insurance, which is also known as permanent life insurance, it’s 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The cash in the policy is able to grow tax-deferred, meaning that there is no tax due on the gain unless or until it is withdrawn by the policyholder.
Unlike term life insurance, which has an “expiration date,” cash value policies 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.
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The cash in a permanent life insurance policy can be surrendered, withdrawn, and borrowed by the policyholder.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 this type of policy 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.
The reason cash value life insurance is such a good product is because they have what we call the Triple Tax Advantage. Cash value life insurance benefits the tax laws of 72 (e) accumulates tax-free, 7702 allows you to access cash value tax-free, 101 (a) tax-free transfer upon death.
Pros and Cons of Cash Value Insurance:
|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 Insurance Policies
No type of life insurance policy generates immediate cash value unless you add a rider such as paid-up additions or an enhanced liquidity rider.
There is one whole life insurance carrier who can provide access to immediate cash value at around 90-95% of the initial premium payment. You would need a HVEC rider and only one carrier offers this. If you would like an illustration from this specific carrier just complete our quote form and we can send you an illustration from this carrier.
Cash value life insurance grows over time and at a steady pace. The best type of policy to maximize cash accumulation is an index universal life insurance policy. Whole life is better if you need to access the cash immediately.
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
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.
Variable Universal Life Insurance
Variable universal life insurance is similar to regular universal life, except that the policyholder 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 death benefit coverage and cash value components. 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 0% for that 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|
Cash Value Policy Loans & Withdrawals.
How does an insured get the money out of a cash value from a life insurance policy? There are several ways to withdraw cash value from a life insurance policy.
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 value 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.
Some life insurance companies offer two types of cash value loan options. You will find these two options mostly in IUL policies.
- Index Loans – (Also known as participating loans) these types of cash value loans charge a certain % (typically 5%) on your loaned out money, but they allow your loaned out money to still participate in the index upside. So if the year over year index credit was a 12% return. Your cash value would get credited the difference in the spread (net 7%) on cash value that is loaned out. In positive years this can be a very powerful compounding feature.
- Fixed Loans – fixed loans after a certain number of years (typically 10) can be zero percent interest loans in an IUL policy with most insurance companies. Your agent will be able to tell you which companies offer a zero perfect fixed loan.
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 policyholder.
Surrender the policy
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.
Cash Value Life Insurance vs. Term Insurance
Term life insurance policies are pure death benefit life insurance policies. Permanent policies are the only types of life insurance with cash value. So there is no cash value in a term life insurance policy which makes this form of coverage much cheaper. Term policies also have an expiration date, unlike cash value policies like whole life and universal life.
What Happens to the Cash Value when you Die?
This depends on what type of policy you have and what death benefit you opted for. There are two types of death benefits. Level and increasing. If you have an increasing death benefit the policy could pay out the death benefit and the majority of the premium paid in which would basically include the cash value being paid out on top of the death benefit.
If you have a whole life policy and you added paid-up additions rider then you could also get have a death benefit that increases over time.
Maximizing a cash value life insurance policy
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 policies. 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.
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