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What Is Cash Value Life Insurance, And How Does It Work?


It can be difficult to shop for life insurance. With so many policy types, riders, and terminology, it can be difficult to determine which policy is best for you. ).

Some life insurance includes cash value as a component. This feature is typically found in permanent life insurance policies such as universal and whole life.

Policyholders have the option to use the cash value for an investment-like savings account or take money out of it.

Although buying cash value insurance might seem like a wise decision, it is not always the best. Here are the facts about cash value insurance.

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What Is Cash Value Life Insurance?

A policy with cash value insurance is one that includes a cash value account. This cash value component usually earns interest and other investment gains and grows tax-deferred.

There are many options available if you need a cash-value life insurance policy. Every policy has a different cash value, but you can access your cash value by taking a loan, withdrawing, or surrendering. These are five types of cash value life insurance.

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Types Of Cash Value Life Insurance

Whole-life insurance

Whole life insurance is a type of permanent life insurance with the lowest cash value. Whole-life policyholders do not have to make decisions about how to invest the cash value. To grow the cash value, the insurance company will provide a fixed rate return.

Here is a brief overview of whole-life insurance:

  • Provides a fixed monthly premium as well as a guaranteed death benefit.
  • Your premium payments don’t change over time.
  • Cash value is guaranteed to accumulate at a minimum rate.
  • If you get company dividends, you can increase cash value quicker. Every year, put these into your cash value account.
  • Whole life insurance is a more expensive option because of its guaranteed life.

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Life insurance with guaranteed issue

Guaranteed issue insurance is a type of whole life insurance. The application process is free of medical exams and health questions. You won’t be denied. These whole-life policies can also be referred to as funeral insurance or final expense insurance.

  • Many times, coverage is limited to $20,000.
  • The cash value may include cash value. However, coverage amounts are very small, so the potential cash value is low.
  • Guaranteed-issue life insurance comes with a Graded Death Benefit. Your beneficiaries will not receive the full payout if the policy is canceled or you die within the first two to three years. You should be familiar with the exact rules regarding graded death benefits before purchasing guaranteed issue life insurance.

Universal life insurance

Universal insurance policies represent the most popular cash value life insurance policies. You should understand the details of what you are buying if you want to grow your cash value.

  • Universal life offers the possibility to accumulate more cash value but with some risk of losing it.
  • Certain types of universal life offer policyholders the ability to adjust premiums and death benefits within certain limits.

Let’s look deeper to see the differences between universal life insurance types.

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Guaranteed universal life insurance

  • Because premiums are stable, whole-life insurance is similar.
  • The accumulation of cash value may not be significant.
  • This is the most affordable universal life insurance option.

Indexed universal insurance

  • The gains and losses of an index such as the S&P 500 can have an impact on your cash value.
  • You can usually adjust your death benefits and premiums within certain parameters.

Variable universal life insurance

  • The growth of cash value is linked to sub-accounts that include stocks and bonds as well as investments you make.
  • You are generally allowed to change your death and premium benefits within a set limit.
  • Investment decisions can lead to a loss of cash value.

Example Of Cash Value Life Insurance

A policy that has a $25,000 death benefit is worth considering. The policy does not have any outstanding loans or cash withdrawals and has an accumulated cash value in excess of $5,000. The insurance company will pay the entire death benefit of $25,000. The insurer now owns any money that is not deposited into the cash value. The cash value of $5,000 is the actual liability cost for the insurance company. It is $20,000 ($25,000-$5,000).

How Does Cash Value Life Insurance Work?

Because it covers the policyholder’s entire life, cash value insurance is considered permanent life insurance. Because of the cash value element, cash value insurance is typically more expensive than term insurance. Because of the cash value element, most cash value life insurance policies require a fixed premium payment.


Life insurance’s cash value earns a modest interest rate, and taxes are deferred on the accumulated earnings. The cash value of life insurance will rise over time. The insurance company’s risk will decrease as the cash value of life insurance increases because the accumulated cash value compensates for part of its liability.

How to use the cash value for premium payments

You may be able to use the cash value to pay premiums if you have enough cash in your cash value account. This option may be an option if you are having trouble paying the premiums.

The policy may be canceled if you take all of the cash value out of the account.

Discuss with your insurance company the rules regarding cash value and how it can be applied to your premiums.

These methods will allow you to tap into the policy’s cash value even while you are still alive.

You can take out a loan against the cash value.

A permanent life insurance policy’s cash value can be used to repay your loan. The interest on your loan amount will accrue until it is fully paid back.

An insurer may calculate interest on a policy loan based on current market rates.

The maximum interest rate on a policy loan is often determined by state law. Take, for example:

  • California allows insurance companies to charge a maximum fixed rate of up to 8.8% per year.
  • Florida has a maximum fixed rate of 8%
  • New York permits insurers to charge interest up to 7.4% on a fixed loan and up to 8.8% on policies with adjustable rates.
  • Texas law states that the annual maximum fixed rate cannot exceed 10%. Texas permits policies with a maximum adjustable rate of interest up to 15%

If you fail to repay the loan amount or you die, the insurance company will deduct the remaining loan balance (including interest) and your life insurance payout to your beneficiaries. This is how some policyholders prefer to spend their cash value and want their beneficiaries to receive a lower payout.

A policy loan also has the added benefit of not appearing on your credit report.

You can withdraw funds from the cash value.

You can also withdraw from your policy. The tax is due if the amount that you withdraw includes investment gains. This portion is often called the “above basis.” Like taking out a policy loan to reduce your life insurance payout, a withdrawal can also affect the future payment of your beneficiaries.

Surrender the policy for cash

You are effectively canceling insurance coverage by surrendering an insurance policy. You can return the cash value of an insurance policy if you surrender it, less any surrender charges.

Insurance companies also take out any outstanding loans or premiums that are not paid. It is better to get some money back than just walking away empty-handed from a policy if it does not suit your needs.

Benefits Of Cash Value Life Insurance

Cash value life insurance may be right for you. It all depends on the reason you want it. These are the benefits of a policy that offers cash value life insurance.

Your beneficiaries receive a death benefit.

A cash value policy is permanent life insurance. It can be in force until you die, as long as your premiums are paid. You must ensure that your policy does not lapse if you take out loans or withdraw money from it.

A cash value policy is a better choice than term life insurance if you want to ensure your loved ones receive something.

Dividends can be earned by life insurance policies that are part of a group.

Many whole-life insurance policies can be “participating,” which means that the policy owner could potentially receive dividends if it is from a mutual insurer.

Dividends are:

  • As cash
  • Add to your cash value
  • To pay premiums

Dividends can also serve to purchase “paid up” additions to your life insurance policy. This increases the death benefit amount for beneficiaries.

Participating in policies can help you lower your life insurance costs.

Riders for extra coverage

Many types of life insurance offer policy riders to add additional coverage or features. An accelerated mortality benefit is a common life insurance ride. This is usually included by default. If you are diagnosed with a terminal disease, this will allow you to access your own death benefit while still alive. This can help pay unexpected medical costs and bills.

You can also add riders to your death benefit for a chronic illness or long-term care if you have certain conditions. Before you purchase your policy, your life insurance agent will inform you about the available rider options.

Cash value life insurance offers tax advantages.

A cash value policy, which is life insurance, can offer tax benefits. The death benefit is tax-free for your beneficiaries, just like any other type of life insurance. This is an important benefit, as life insurance payouts can be quite large.

Another tax benefit is the tax-deferred accumulation of total cash value. The IRS does not take a cut as your cash value increases.

You won’t be taxed if you borrow money to cover the policy. As long as the policy remains in force, the loan is not taxable.

You can be taxed if you withdraw cash value, take the surrender value, and end the policy.

It is important to be familiar with tax rules before you take out any money. This will ensure that you don’t get a surprise tax bill.

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Drawbacks To Cash Value Life Insurance

Cash value life insurance may not be right for everyone. These are the potential downsides of cash value life insurance.

Term life insurance is cheaper than cash value life insurance.

Cash value insurance is more expensive than term life insurance.

Term insurance is the best option if you are looking for life insurance to cover a particular debt or a set amount of time. Although it does not offer cash value, the policy will pay out a death benefit amount if you die while it is in effect.

Term life insurance is perfect for protecting your mortgage payments or covering the time it takes to make your children financially independent. It won’t be as expensive as other forms of cash-value life insurance like whole life insurance. Term life insurance is the best option if you don’t require insurance for the rest of your life.

Many term policies allow you to convert to permanent life insurance later.

If you are unable to provide financial support for your family members, life insurance can be a financial safety net. Although cash value life insurance might seem appealing, it is not a good idea to spend the extra money if you don’t have insurance for a long time.

Similar: Comparing Term and Whole Life Insurance Whole Life Insurance

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It can take time for cash value to grow.

Some policies take a while to accumulate significant cash value. It is possible to wait for decades before you can access a significant amount. Some life insurance policies allow for cash to be built up faster in the first years. Talk to an expert life insurance agent to help you find the right products.

Beneficiaries are not entitled to the cash value.

Cash value usually reverts to your life insurance company upon your death. The policy’s death benefit amount is paid to your beneficiaries, less any cash value withdrawals or loans. However, some policies will pay the death benefit plus cash value to beneficiaries. You should be prepared to pay significantly more for this feature.

Why Consider Cash Value Life Insurance.

Permanent life insurance policyholders have the option to borrow against the accumulated amount, which is a combination of regular premium payments and interest and dividends that are credited to the policy.

Do I Need To Look At Buying Cash Value Life Insurance?

If you are looking to build a nest egg over a period of many decades, cash value life insurance may be a good savings option. This can also work well with a retirement plan such as an IRA or 401k. Cash values don’t often begin to accrue until after two to five years.

What Happens If You Take Cash Out Of Your Life Insurance Policy?

The death benefit will be reduced if you withdraw from the cash value of a life insurance policy. The policy will be terminated if you have withdrawn all of the cash value. The IRS considers your withdrawal of money from life insurance a return of the premiums paid. You can withdraw the amount you want without having to pay taxes. Dividends gain are subject to tax, but only after you have withdrawn all premium payments.


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