When Should I Consider Cash Value Life Insurance?

Cash value life insurance should be purchased if you’re seeking a policy that combines the security of a death benefit with an added savings or investments component. Available in various formats like whole, universal and variable, this insurance type offers the flexibility to borrow or withdraw from the accumulated value. However, it's essential to factor in its higher premiums and potential tax consequences.

Learn about the various other pros and cons of a cash value life insurance policy and how you can get coverage.

Key Takeaways To accrue cash value, a life insurance company deposits a portion of the premium paid in a savings or investment account, which can then grow over time. You can access these funds by making a withdrawal, taking a loan or surrendering the policy. If you buy cash value while young, this type of policy can be a useful way to access funds for emergencies, major expenses and more. Premiums are lower for younger and healthy people, but rates will also consider your habits, medical history, occupation and more. Whole life insurance for a 20-year-old male can cost $40.24 monthly, while indexed life insurance for a 65-year-old male can cost $491 monthly.

What Is Life Insurance With Cash Value?

Life insurance with cash value is a type of permanent life insurance policy with two key elements: a death benefit and the potential to accrue equity over time. Similar to a term life insurance policy, cash value life insurance will pay a death benefit when the insured dies. In addition, the policy also has the potential to accrue cash value, which can be later withdrawn from or borrowed against as a loan.

It should also be noted that “cash value life insurance” is an umbrella term. Universal, variable and indexed life insurance are all types of life insurance that are distinguishable but still share the cash value component.

How Does Cash Value Life Insurance Work?

Accruing cash value in a life insurance policy is made possible by depositing a portion of your premium into either a savings account or an investment account. Over time, this account can accrue growth.^[1]

The rate of growth will depend on what type of policy you purchase. Whole life policies offer guaranteed growth but at a fixed lower interest rate. Meanwhile, a policy like variable life insurance lets you invest your money in the stock market, usually via mutual funds, with the possibility of growing at a much higher rate. However, when your cash value’s growth is tied to market performance, it is also possible for you to lose money if the market tanks.

The advantage of having cash value is that you can access some of that money while you are alive in the form of either a withdrawal or loan.

If you start this account while you are young, then you may have access to a sizable cash reserve when you’re older that can be used for a major expense. For example, say you buy a variable life insurance policy and 45 years later, you’ve accrued $50,000 in cash value. You can borrow against this amount to perhaps pay for your child’s college tuition, a down payment on a house, an expensive medical procedure or even a new business you’re starting.

The caveat, however, is that a withdrawal or a loan that goes unpaid will reduce the size of the benefit your beneficiary receives when you die. Alternatively, it is possible to liquidate your cash value account entirely, though this will forfeit your policy entirely.

How Do I Access the Life Insurance Cash Value?

There are three primary ways you can access the cash value that has accrued in your life insurance policy and spend it:

1. Take out a loan: You can borrow against the accrued cash value but you will have to repay the borrowed amount over time plus interest. If you fail to repay it, the outstanding amount plus interest will likely be deducted from your death benefit.
2. Make a withdrawal: This involves liquidating a portion of the accrued cash value but you will not repay it. However, this will reduce your death benefit and your beneficiary will receive less when you die.
3. Surrender the policy: Essentially canceling your policy, you can take all the accrued cash value but your beneficiary will not receive a payout when you die.

Warning: Accessing your life insurance's cash value can be a taxable event if you’re not careful. If you don't repay a loan and the policy ends or you die, or if you withdraw or surrender the policy, amounts exceeding the total premiums paid (the policy basis) are typically taxed under Tax Code Section 7702.^[2] For instance, if you've paid $20,000 in premiums and withdraw $30,000, the $10,000 difference may be taxed.

There may be additional tax rules surrounding life insurance policies and it can get complicated when cash value is involved so it’s always best to consult a tax professional before accessing it.

What Can I Do With the Cash Earned Over Time?

When you access the cash value in the form of a withdrawal or a loan, there is no limitation on how you spend it. Whether you use it to pay for your child’s wedding, put a down payment on a home or invest it in annuities or the stock market, the choice is yours.

However, there are interesting ways you can spend the cash value within the life insurance policy itself. For example, once you reach a point where your life insurance policy is making enough money passively, you can use that income to pay your premiums. You may even want to use the extra income to increase your death benefit by paying a higher premium if your policy allows for it.

What Types of Life Insurance Policies Build Cash Value?

There are several types of life insurance with cash value availability.

Whole Life Insurance

Whole life insurance is a permanent life insurance policy covering the policyholder's entire life. Often a preferred choice in the insurance market, it offers a guaranteed death benefit as long as premiums are paid. However, whole life policies often feature lower fixed interest rates so the cash value’s potential growth is quite low when compared to other types of cash value life insurance.

Universal Life Insurance

Both whole life and universal life insurance share similarities but they differ notably in flexibility. Universal life insurance offers adjustable premium payments, allowing you to increase or decrease your benefit when you’re older. Similarly, universal life insurance policies also typically grow in cash value at a fixed lower rate.

Guaranteed Issue Life Insurance

Guaranteed issue life insurance provides whole life coverage without needing a medical exam or health questionnaire, ensuring no one is denied. While it might offer a cash value component, the coverage amounts and consequently the potential cash value, are typically limited. If the insured passes away within the first two or three years after the purchase of the policy, beneficiaries usually receive a reduced payout, unless the death resulted from an accident.^[3]

Variable Life Insurance

In a variable life policy, policyholders can direct their premiums toward investments like mutual funds, unlike the savings approach of whole life policies. While this offers higher growth potential in a strong market, it also carries risks: poor investments can lead to losses. If the policyholder can't cover premiums and associated fees, the policy is surrendered.

Indexed Life Insurance

Indexed life insurance ties its growth to the stock market, with the performance of the chosen index directly influencing the policy's cash value return rate. Although indexed universal life insurance carries some market risk, it usually offers a guaranteed minimum interest rate, providing a safety net for policyholders.

What Are the Pros and Cons of Cash Value Life Insurance?

Having a cash value life insurance policy comes with advantages and disadvantages.

Pros	Cons
Death benefit payout	Higher costs
Permanent coverage	Slow cash value growth
Potential dividends	Cash value isn’t always inherited
Customization with riders	Risk of policy lapse
Tax benefits	Potential taxes
Lower interest rate	Decrease in death benefit
Money earned over time

Pros

• Death benefit payout: Your beneficiaries will receive a tax-free payout upon your death, which they can use to cover funeral fees and living expenses.
• Permanent coverage: This policy lasts a lifetime as long as premiums are paid.
• Potential dividends: In some cases, purchasing a life insurance policy also purchases a piece of ownership in the company, entitling the policyholder to dividends (a reimbursement of a part of the premiums you've paid for your coverage) over time.
• Customizable with riders: Add options like accelerated death benefits, often at no extra charge or others like chronic illness, critical illness or long-term care coverage.
• Tax benefits: Cash value grows tax-deferred and borrowing against the policy isn't taxable under the right conditions. In addition, beneficiaries receive the death benefit tax-free.
• Lower interest rate: Interest rates from a cash value loan may be lower than those on a personal loan.
• Money earned over time: You can earn money that can be borrowed against or withdrawn through your policy.

Cons

• Higher costs: Premiums for cash value life insurance policies are usually higher than term life insurance policies. In addition, there may be administrative fees if investments are involved.
• Slow cash value growth: In some cases, the money in your cash value account may have higher growth potential if you instead put it in a high-yield savings account, invest it directly in the stock market or make higher contributions to your 401(k) or IRA account.
• Cash value isn't always inherited: Typically, the insurance company retains the cash value upon death, while beneficiaries get the death benefit minus any debts.
• Risk of policy lapse: If you’re unable to cover your premiums, your policy will lapse and get canceled.
• Potential taxes: Withdrawing, terminating the policy or failing to repay a loan before you die can lead to taxation on interest or gains. Also, withdrawing an amount higher than the total premiums paid can also be taxed.
• Decrease in death benefit: If loans remain unpaid after you die, your beneficiaries will likely receive a diminished death benefit.

Who Is Cash Value Life Insurance Best For?

Cash value life insurance is particularly beneficial for individuals seeking both a death benefit and a savings or investment component. The cash value component grows over time, offering policyholders an opportunity to borrow against or even withdraw from it in the future. As such, younger adults or middle-aged individuals should consider buying life insurance with a cash value component as it allows them to build a cash reserve alongside their coverage.

Additionally, high-income earners who have maxed out other tax-advantaged savings options might consider cash value life insurance as a supplementary vehicle for wealth accumulation and estate planning purposes.

How Much Does Cash Value Life Insurance Cost?

Life insurance premiums are determined by several factors including the policy's death benefit, the insured's age, gender, health, tobacco habits, family medical history, lifestyle, occupation, insurance provider and type.

We’ve provided a simple table showing the varying monthly costs based on gender, age and coverage.

Policy Type	Gender	Age	Coverage	Cost
Whole Life Insurance[4]	Male	20	$50,000	$40.24
Universal Life Insurance[5]	Female	35	$250,000	$83
Guaranteed Issue Life Insurance[6]	Male	45	$10,000	$36.40
Variable Life Insurance[7]	Female	55	$250,000	$340
Indexed Life Insurance[8]	Male	65	$250,000	$491

How To Get Cash Value Life Insurance

While seeking insurance coverage, it's recommended to gather three to five quotes from various carriers. But sharing personal details like age, health history and occupation with each can be time-consuming. Thankfully, platforms like SmartFinancial simplify this. Just complete their one-time questionnaire about your needs and budget to quickly get a tailored commercial insurance quote. Start by entering your zip code below for a FREE quote.