What is cash value life insurance?
How does cash value life insurance work?
Permanent life insurance is designed to build cash value by placing a small amount of your coverage payment in a separate account to earn interest. As your payments earn interest over time, the total cash value of your policy grows.
Eventually you may be able to withdraw funds or borrow against your savings — giving you the benefit of financial flexibility while you’re alive. As long as you’ve paid off your loans and maintained cash in your account, your loved ones will receive the total cash value of your life insurance policy along with your death benefit.
Types of life insurance policies with cash value
Whole life insurance
Whole life insurance is designed to provide coverage for your entire life as long as you pay your premiums. The rate you apply for is often locked in, meaning you won’t have to pay more as you age.
With whole life insurance, a certain amount of your coverage payment is typically placed in a cash account with a low fixed interest rate. This means your rate of growth will remain steady regardless of market conditions.
Universal life insurance
Universal life insurance is similar to whole life insurance in that it’s designed to provide coverage your entire life — but there’s one key difference. With universal life insurance, you can increase or decrease your policy benefit and premium depending on your family’s needs at the time.
Even if you decrease your coverage amount and your premium goes down, a small amount of what you pay each month will still go into a cash account to earn interest. Some universal life insurance policies offer fixed low interest rates like whole life insurance does, while others offer access to higher rates of growth, depending on market conditions.
Variable life insurance
Variable life insurance offers coverage for your entire life while giving you the ability to invest your cash value in a variety of ways. These additional investment options may help you achieve higher rates of growth over time, but they may also involve greater risk and exposure to market conditions.
Factors influencing life insurance that builds cash value
Monthly payment amount
The amount you pay each month affects how fast your cash value grows. If you have a cash value policy with a higher monthly premium, more money will be placed into the cash account. If you have cash value insurance with a lower monthly payment, less cash will be available to earn interest.
Interest rate
Your cash account’s interest rate plays a significant role in how your policy builds value. Cash value life insurance policies with fixed low interest rates may experience slower growth than those with the potential for higher interest rates.
Time
Time is another key factor in building cash value. It often takes years to build cash savings through small monthly payments, even if you have a policy with a high interest rate.
Accessing the cash value of your policy
In general, you can check your policy’s cash value by reviewing your most recent statement or contacting your insurer. Keep in mind that the method you choose to access its value may be taxable.
Make a partial withdrawal
It’s often possible to make a partial withdrawal from your policy’s cash value. As long as you don’t withdraw more than you’ve paid in, the amount you take out is generally tax-free. You also typically don’t need to repay the amount you withdraw.
There are important factors to consider with partial withdrawals. Your cash value growth may slow down because the amount earning interest in your account will decrease. Your beneficiaries might also receive a smaller benefit than if you had preserved the policy’s total cash value.
Borrow against your cash value
Many insurers allow you to take out a loan against your policy’s cash value. This helps give you the ability to cover necessary expenses while preserving the cash value of your policy. Loans borrowed against life insurance policies with cash value typically have lower interest rates and are generally not taxable as long as you maintain coverage.
Be aware that unpaid loans could negatively impact the total death benefit your loved ones receive. If loan payments aren’t made, you could also risk losing coverage.
Surrender your policy
Another option is to surrender your cash value life insurance policy. You’ll receive the total cash value of your policy as a lump sum, but as a result, your coverage will end. You’ll also likely need to pay taxes on the lump sum you receive. If you want to ensure that your loved ones receive a death benefit, this may not be a good option for you.
Benefits of life insurance with cash value
Financial flexibility and security
The ability to borrow against the cash value in your life insurance or withdraw funds could give you and your loved ones added financial flexibility. If a surprise bill places a burden on your family, your cash account may help provide relief.
Long-term investment potential
Building cash value through your life insurance policy also offers the opportunity to achieve long-term investment growth. Through continual monthly payments and growth from interest, your loved ones may receive your death benefit and cash on top.
What to consider before purchasing cash value life insurance
For permanent life insurance that has cash value, you’ll need to prepare to make payments your whole life. Your monthly premium may also be higher than if you chose temporary coverage like term life insurance. Life insurance that builds cash value could give you an added layer of financial security in the present while helping your loved ones receive a larger benefit later on. You can begin your search for cash value life insurance today by getting a quick quote from TruStage™.
