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Cash Value Life Insurance: What is it?

By Lloyd Harvey·April 14, 2023·5 Minute Read

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Cash value life insurance is a trending topic on social media right now. While it’s certainly exciting to see influencers take an interest in life insurance, it is crucial to understand what cash value on a life insurance policy is and how you can use it. 

What is Cash Value Life Insurance?

Cash value life insurance is a type of permanent life insurance with a cash value component (aha, now the name makes sense). 

Like all life insurance, cash value life insurance has a death benefit, the amount your beneficiaries receive if you pass away insured, and a premium, the amount of money you pay your insurance company for coverage. 

If you have cash value life insurance you may be able to use the cash value for a withdrawal, a life insurance loan, or to pay your premium. 

There are a few different forms of life insurance with cash value features, but the two main types are whole life insurance and universal life insurance.  

Types Of Life Insurance Policies with Cash Value

There are several forms of permanent life insurance policies that build cash value, but each one does so differently. It’s a good idea to do your research and talk to a financial advisor if you have any questions. 

Below are the two most commonly purchased types of cash value life insurance: 

Whole Life Insurance

Whole life is one of the more popular types of cash value insurance because whole life policies typically have a fixed premium. As long as you make your premium payment, the death benefit on your whole life insurance policy is in force. 

Universal Life Insurance

Universal life insurance also provides permanent coverage and a cash value feature. Some universal life insurance policies offer flexible premiums and an adjustable death benefit, which allows policyholders to adjust the cost of their life insurance as long as it meets the cost of insurance (COI) minimum. 

If you pay more than your COI, the insurance company will add the additional funds to your policy’s cash value. Cash value on universal life insurance builds at either a minimum interest rate or the current market interest rate, whichever is greater. 

Does Term Life Insurance Build Cash Value?

No, term life insurance policies do not build cash value. This is one of the reasons cash value life insurance policies cost more than term life insurance policies. The other reason? Permanent policies stay in force as long as you make your premium payment.

How Does a Cash Value Build on a Life Insurance Policy?

A cash value life insurance policy typically starts to accrue cash value two to five years after the policy is activated. When you make your premium payment, some of that money will go to your policy’s death benefit and some toward its cash value. 

Wondering what happens to the cash value on your policy after you die? If you pass away with cash value, that money reverts to the insurance company — your beneficiaries receive only your policy’s death benefit. 

How To Use Cash Value on a Life Insurance Policy 

Now that you know the basics of cash value life insurance, you might be wondering how to actually use it. You can always reach out to your insurance agent or a financial advisor, but to give you a general idea of your options, here are some ways you might use cash value on life insurance:

  1. Pay your cash value life insurance policy’s premium. Once you accrue cash value, you can use it to fund your premium payments. If you go this route, it’s a good idea to keep an eye on your balance (and your premium cost if it’s not fixed). Missed premium payments can cause an insurance policy to default and expire.
  2. Take out a life insurance loan. If you are looking for some funds and have cash value on your insurance policy, life insurance loans have a few advantages over bank loans. To qualify for a life insurance loan, your policy typically is required to be in force for three years and have enough cash value to cover the loan; no credit check or employment verification is involved. An added perk — life insurance loan interest rates are typically lower than bank loans. 

Another nice thing about life insurance loans is that you don’t have to make payments on them if you don’t want to, but the balance does accrue interest. This is important because if your loan balance exceeds your policy’s cash value, the policy could lapse (which would result in losing coverage). 

  1. Make a withdrawal. You can withdraw some or all of your life insurance policy’s cash value. The neat part about making a withdrawal on a cash value life insurance policy is that the amount you take out is typically tax-free (if it is less than you have put in).
  2. Remove all the cash value and surrender your policy. If you have had your policy for at least three years and determine you no longer need coverage, you can surrender your cash value life insurance policy. 
  3. Should you decide to cancel your life insurance, you will receive the cash value, less fees (and you would have to pay your loan balance in full if you had one). If you get more money than you paid in, that extra amount is considered taxable income.

When To Buy a Cash Value Life Insurance Policy

Life insurance coverage can help provide your loved ones with a bit of financial protection. If you were to pass away insured, your beneficiaries could use the payout from your life insurance policy to pay down debts or recover from the loss of your income. 

It might be the right time to apply for life insurance if you have or plan to have a mortgage, business, or dependents. But what about cash value life insurance specifically? Is there a right time to buy life insurance with living benefits? 

Cash value life insurance is always more expensive than term life insurance policies with the same death benefit, but for some people, that extra cost might make sense. If you are younger, in good health, and can budget for the higher premiums, the cash value you build could come in handy if you are looking for a way to diversify your financial portfolio. It’s a good idea to talk to a financial advisor if you have specific questions on cash value and the role it can play in your financial plan.

When To Buy a Term Life Insurance Policy

Buying life insurance is an important decision. The amount of coverage and type of policy you have can impact your financial situation while you are alive and that of your loved ones when you pass away. If you’re shopping for life insurance and looking for a jumping off point, you might want to start by comparing life insurance quotes.

Bestow’s life insurance quote tool gives you an estimate in seconds, and you don’t have to enter any personal information to use it. 

Forbes - Ranked #1 “Best Life Insurance Company” in the U.S. by thousands of real customers. Get a quote.

If you like what you see, the application process is simple too. There is no medical exam or lab test involved. Instead, it’s a few pages of personal, health, and lifestyle questions, a couple of clicks, and boom — you’re done. Everyone gets an instant decision, and rates start from just $11 per month.

This article was reviewed through a partnership with eFinanical. If you want more information about cash value life insurance, visit eFinancial to talk to one of their agents.

Key Takeaways

  • Cash value life insurance policies provide permanent coverage and a cash value component.
  • Whole life insurance and universal life insurance are two main types of cash value life insurance. 
  • You can use cash value on a life insurance policy to pay premiums, take out a life insurance loan, or make a withdrawal.