Life insurance offers an accessible means by which people with average incomes can make sure that their death doesn’t cause financial hardship for their loved ones.
Cash value life insurance has two parts. The first is a straightforward life insurance policy that pays a set amount when the insured person dies if the policy is in good standing. The second is an investment account where part of the policy premiums goes to gain value.
The insurance company guarantees the policy owner a certain rate of return throughout the time they own the policy. That growth is called the policy’s cash value accumulation. This cash value is tax-deferred, like a retirement account. So, the owner of the account doesn’t have to pay taxes on the interest gained over time until they decide to withdraw it.
Cash value life insurance is a long-term investment
This type of life insurance is classified as permanent, which means that it’s designed to last your entire lifetime, no matter your health condition or age. You’ll pay a higher premium than you would with a term life insurance policy. The insurance company uses this extra money to create and invest the cash value portion of the policy.
There are fees associated with setting up and managing a cash value life insurance policy, of course. For this reason, it will take a number of years for the policy to build up cash value. The insurance company applies much of the premium payments to their fees and expenses during the first few years.
Cost of cash value life insurance
Like other types of life insurance, cash value insurance premiums vary according to the insured person’s health, their age, and the policy size. However, this type of life insurance is much more expensive than a simple term life insurance policy.
For people with a stable income who want a product that combines life insurance and investments for the long term, cash value life insurance may be the right choice.
If your budget is tight or if you have income that goes up and down but you still want life insurance, you may be better off with a term life policy.
Why buy cash value life insurance?
There are many reasons people buy a cash value life insurance policy. They may want to make sure that they are insured for as long as they live, no matter their age or health status at death. They may want a more versatile financial product, or they may want to diversify their investments by adding life insurance to the mix.
People who own a cash value life insurance policy for more than a few years can borrow against the value of the policy. So, when it’s time to make a down payment on a house or put the kids through college, there are funds available that don’t require credit cards or a personal loans.
If the death benefit of the insurance policy is no longer needed, it’s possible to surrender the policy in exchange for its accumulated cash value. There are always fees associated with this process, though. When you surrender your life insurance, you’ll no longer be covered by the death benefit of the policy.
At some point, policyholders can use the cash value they’ve built up in the policy to pay the premiums. Later in life, when a fixed income restricts your budget, this is one way to preserve the death benefit without having to pay high premiums.
Types of cash value life insurance
If you are interested in purchasing a cash value life insurance policy, you have several choices. All cash value life insurance offers a permanent guaranteed death benefit.
Whole life insurance
With a guaranteed death benefit and regularly-scheduled premiums that don’t change over time, whole life insurance is a popular option for people who want to combine life insurance with a long-term investment.
Policyholders can withdraw funds from the cash value. They can also take out a loan against the cash value once it's accumulated to a certain level. If the loans are unpaid upon the death of the insured person, the death benefit is reduced by the loan amount.
When the insured person dies, their beneficiary gets the death benefit, but the insurance company keeps the accumulated cash value of the policy.
Variable life insurance
This type of insurance offers flexible premiums. Policy owners get several investment options to suit their financial goals. The death benefit isn’t predetermined like other life insurance policies. It is dependent on how the fund performs over time. If the policy is making money, the death benefit will be larger. Making larger premium payments can increase the cash value of the policy.
Universal life insurance
With a universal life insurance policy, accumulated cash value earns based on the larger of a current market interest rate or a minimum interest rate. The portion of the policy payments used to cover the insurance component of the policy increases as the policyholder ages. The insurance company keeps the cash value of the policy when they pay the death benefit.
Cash value life insurance is a permanent life insurance product that combines investing with a death benefit. Many people decide to simply purchase an inexpensive term life insurance policy and use the money they save on premiums to invest on their own. With the right strategy and the attitude that making money from investments takes decades, it’s possible to avoid paying high fees associated with cash value life insurance policies while making money on low-fee investments.
For many people, it just doesn’t make sense to trust a life insurance company to handle their retirement savings. Complicated rules and high fees lead many people to choose a term life insurance policy combined with a simple IRA over high-priced permanent life insurance products.
To find out how much a term life insurance costs, answer a few quick questions.