When it comes to life insurance, knowing you will always be covered can offer you extra peace of mind. Cash value policies aim to deliver that reassurance.
Assuming you stay current with the premiums, cash value policies remain in effect as long as you live, allowing your heirs to collect the benefit no matter what. Policies also have a savings or investment feature that you can tap in to while you’re still living.
Given those advantages, it may come as no surprise that cash value policies are popular. In 2022, they represented about 80% of the life insurance market, according to trade group Limra.
Still, financial planners say you should think carefully before choosing a cash value policy. The main alternative, term life policies—which are in place for a specific term, such as 10 or 20 years—have some big advantages of their own. Term policies tend to be far cheaper than permanent ones, and for that key reason many financial planners say they represent a better value for most consumers.
Before purchasing a policy, here’s what you need to know about cash value life insurance.
What is cash value life insurance?
Although you’ll see insurance companies advertise various life insurance products, all policies can be divided into two categories: term and cash value.
Term life insurance, also known as temporary insurance, is for individuals that want simple, inexpensive coverage. Term policies pay out a death benefit, or a lump sum of cash, to the beneficiaries if the covered person dies during the policy term; after that, there is no payout. And if the covered person survives the term policy, the premiums are not refunded.
Cash value policies are quite different. They provide permanent life insurance coverage that lasts for as long as you pay your premiums. For that reason, they’re often referred to as permanent policies. Cash value policies also include a savings element, which you can tap while you are still alive.
How your policy’s cash value works
Cash value life insurance is so named because of its ability to build cash value. When you pay your premiums, a portion of the money is set aside and functions like a tax-deferred savings account. If you build enough cash value, you can access it in the following ways:
- Take out a loan from the cash value
- Put it toward your policy’s premiums
- Withdraw cash
The idea of accumulating a cash balance that you can use later may be appealing. It means you can still enjoy some of the money you spend on your life insurance policy while you are still alive. And tapping your cash value won’t decrease your death benefit either—it’s essentially a separate savings vehicle bolted on the side of your life insurance plan.
There is a big downside, however. In order to fund both a death benefit and a saving account you can enjoy later in life, the premiums you pay need to be large, and the interest rate you are offered on the savings account is often far below what you could earn if you simply took out a cheaper term life insurance policy and invested the leftover money in stocks and bonds. The upshot: The value of your cash balance will take years to grow, and is likely to remain just a small fraction of what you could earn simply investing on your own.
Types of cash value coverage
There are two main types of cash value insurance:
Whole life
Whole life insurance is the most popular form of cash value insurance. With a whole life policy, the cash value grows at a fixed rate of interest.
Universal life
Universal life policies are more flexible than whole life policies. You can adjust the premiums or death benefit as your family’s financial needs change and the cash value can be invested in the stock market. However, depending on the performance of your investments, the cash value can decline.
Benefits and drawbacks to consider
Cash value insurance can be significantly more expensive than term life coverage. According to PolicyGenius, an insurance marketplace that allows customers to get insurance quotes from multiple companies, whole life policies—the most commonly used form of cash value coverage—is about 10 times the cost of term coverage.
What You’ll Pay: Whole vs. Term Life Insurance
The average monthly premiums for a $500,000 policy for a healthy 35-year-old.
| Whole Life Policy | 20-year Term Life Policy | 30-YearTerm Life Policy | | Women | $481 | $26 | $39 |
| Men | $571 | $31 | $47 |
Average premiums are based on PolicyGenius’ data using rates from 10 leading insurers.
Source: PolicyGenius
However, cash value insurance can be appealing because it can last for your lifetime. And instead of losing all of your premiums, you can get a portion of what you paid back through the policy’s cash value.
But according to Jay Zigmont, a certified financial planner based in Water Valley, Miss., and the founder of Childfree Money, that perk can be misleading, as people think they’re growing their money.
“You see a lot of people talking about how these policies allow you to be your own bank, but what they’re actually doing is giving you some of your money back from the premiums you paid after they take out their fees and commissions,” Zigmont said.
With term life coverage, you can often buy a policy directly from an insurance company. But with cash value policies, you usually have to work through an agent that earns a commission on policies they sell, so they have a financial incentive to sell certain products. Although cash value policies can earn interest or returns through investing, the fees can eat into your returns, and you may be better off investing on your own.
“The fees can be all over the place,” Zigmont warned. “Some are 5% or 10% upfront, and some are 2% over the life of the contract. It depends on how it’s structured, and insurance companies can actually adjust the products to increase or decrease their commissions.”
How to get cash value life insurance
Although some employers offer permanent life insurance as part of their benefits packages, you can purchase an individual policy on your own. Depending on the amount of coverage you want, you can get cash value insurance online or through an agent or advisor.
Online
Some companies sell smaller permanent life insurance policies—such as policies with death benefits of $50,000 or less—directly to consumers through their websites. Some of them are simplified or guaranteed issue, so you don’t have to undergo a medical exam, and policies go into effect as soon as you pay the first premium.
Agent or financial advisor
If you want to buy a policy with a larger death benefit, you’ll usually have to work with an insurance agent or financial advisor that sells life insurance. You can work with an independent insurance agent near you or you can use an insurer’s network of agents to purchase a policy.
The agent or advisor will meet with you in person or over the phone to discuss your needs and finances and will make recommendations about specific policies. If you decide to proceed, they will work with you to set up a time for a medical exam and to fill out the other required paperwork.
After the medical exam, the agent or advisor will share the policy premiums and other details with you. You usually have a few days to review and sign the materials, so take the time to read them carefully. Particular issues to look for include:
- Does the cash value earn interest or is it invested?
- Are there caps on how much you can earn in interest?
- What is the timetable for cash value accumulation?
- What are the surrender fees if you decide to stop paying the premiums?
- Are the fees and commissions fixed, or can they fluctuate over time?
Keep in mind that agents and financial advisors are compensated only if you buy certain types of coverage. According to the American Council of Life Insurers, life insurance companies paid $51 billion in commissions to agents in 2021, the last available data, so it’s important to know what kind of insurance you want before meeting with an agent. And if the agent makes a recommendation you’re unsure about, it’s wise to ask what commissions they earn if you buy that product.
Who should have cash value coverage?
Permanent or cash value life insurance is a more complex and expensive form of coverage, so it’s not suitable for everyone. Generally, financial planners say that cash value policies are best for the following groups:
- Those who have an existing permanent policy may consider switching to term life coverage to save money. But if you have existing health issues, you may not qualify for coverage (and may be denied coverage entirely). Keeping your permanent policy may be the only way to maintain life insurance coverage.
- High net-worth individuals who are looking to take advantage of tax-deferred cash value growth and tax-free death benefits for their loved ones.
- Those who have trouble saving on their own
Andrew Latham, a financial planner and director of content at SuperMoney in Santa Ana, Calif., said the cash value insurance may be useful for high net-worth individuals, but it doesn’t make sense for most families.
“If you’re terrible at saving or if there’s no way you’ll put [the amount of your premiums] in an investment account on your own, maybe it’s worth it,” says Latham. “But otherwise, term life insurance and investing the difference is the smarter option for most people.”
Got a money question? Let Buy Side find the answer.Emailmoney@buysidewsj.com.
Include your full name and location, and we may publish your response.
FAQs
A cash value life insurance policy may be worth considering if you want long-term coverage and the ability to access savings later in life. But if you don't think you'll need access to a cash value account during your lifetime, it may not be worth the higher premiums.
Is investing in cash value life insurance worth it? ›
A cash value life insurance policy may be worth considering if you want long-term coverage and the ability to access savings later in life. But if you don't think you'll need access to a cash value account during your lifetime, it may not be worth the higher premiums.
What is the downside of cash value life insurance? ›
Pros: It usually covers you for your entire life, builds cash value and is relatively simple compared with other permanent life insurance options. Cons: It's typically more expensive than term life, so if you're looking for affordable life insurance, you might want to explore other options.
What is the point of cash value in life insurance? ›
This is often referred to as the "face value" of your policy, or the amount of life insurance coverage you purchased (for example, a $500,000 whole life insurance policy). Cash value, an additional feature that might make your policy more valuable, because you may be able to access the money while you're still alive.
How do rich people use cash value life insurance? ›
High-earners and wealthy people can use life insurance to pay estate taxes on a large inheritance. Cash value life insurance offers an alternative tax-deferred investment account if you've maxed out traditional accounts. Life insurance trusts can be used alongside permanent life insurance to maximize your assets.
Why do financial advisors push cash value life insurance? ›
There will be a hefty cash surrender fee if you want to cash out your plan early. The real reason life insurance agents and financial advisors push these plans is because they get huge commissions.
Can I withdraw my cash value from life insurance? ›
You can usually withdraw part of the cash value in a permanent life policy without canceling the coverage. Instead, your life insurance beneficiaries will receive a reduced payout when you die. Typically you won't owe income tax on withdrawals up to the amount of the premiums you've paid into the policy.
What is the cash value of a $10000 life insurance? ›
The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.
What happens to the cash value after the policy is fully paid up? ›
What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.
How long does it take to build cash value on life insurance? ›
How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.
While it isn't always advisable to cash out your life insurance policy, many advisors recommend waiting at least 10 to 15 years for your cash value to grow. It may be wise to reach out to your insurance agent or a retirement specialist before cashing in a whole life insurance policy.
How much does a $1 million dollar whole life insurance policy cost? ›
The cost of a $1 million life insurance policy for a 10-year term is $32.05 per month on average. If you prefer a 20-year plan, you'll pay an average monthly premium of $46.65.
Do you have to pay back cash value life insurance? ›
You don't have to repay these loans, but interest will continue to accumulate. If the total outstanding loan balance including interest ever exceeds the cash value, the policy will lapse, ending your coverage.
Why do millionaires get life insurance? ›
Life insurance is a popular way for the wealthy to maximize their after-tax estate and have more money to pass on to heirs. A life insurance policy can be used as an investment tool or simply provide added financial reassurance.
Why rich people get whole life insurance? ›
For many rich people, it makes sense to purchase whole life insurance, because this kind of policy can provide a death benefit to loved ones that is generally tax free. And this money can be used to pay estate or inheritance taxes, so that other estate assets do not have to be liquidated to cover this cost.
What type of life insurance do rich people get? ›
Cash value life insurance (also called whole life insurance) is a great form of life insurance for wealthy individuals, as it's a way to have tax-deferred savings, especially if you've maxed out other retirement accounts.
What is the cash value of a 100 000 life insurance policy? ›
The cash value of your settlement will depend on all the other factors mentioned above. A typical life settlement is worth around 20% of your policy value, but can range from 10-25%. So for a 100,000 dollar policy, you would be looking at anywhere from 10,000 to 25,000 dollars.
What is the cash value of a 250 000 life insurance policy? ›
For example, if you have a $250,000 policy and withdraw $25,000, your beneficiaries will only receive a $225,000 death benefit from your policy.
Do you pay taxes on cash value withdrawal from life insurance? ›
Generally, life insurance death benefit payouts received as a lump sum are not taxable. The cash value growth within a permanent life insurance policy is typically not taxable either.
How much is $10 000 life insurance a month? ›
The cost of a $10,000 whole life policy is generally about $25-$150 monthly. Understand that the cost of final expense whole life insurance depends on your exact age, health, prior tobacco usage, gender, and state of residence. Below is a whole life insurance rates by age chart for $10,000 in coverage.
Cash value is not paid to beneficiaries
When you pass away, cash value typically reverts to the life insurance company. Your beneficiaries receive the policy's death benefit amount, minus any loans and withdrawals of cash value you made.
How to make money off of life insurance? ›
How To Use Life Insurance To Get Cash When You Need It
- Surrender Your Policy for its Cash Value. ...
- Sell Your Life Insurance Policy for Cash. ...
- Withdraw Your Cash Value of a Whole Life Insurance Policy. ...
- Borrow Against the Cash Value on Whole Insurance. ...
- Borrow Against Your Death Benefit. ...
- Receive an Accelerated Death Benefit.
Loan limits: The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. If you need more than that amount, you may need to consider other loan types.
Is cash value of life insurance an asset? ›
Some types of permanent life insurance have an additional living benefit, called cash value. If your life insurance policy accumulates cash value, the cash value is considered an asset, because you can access it.
What is the difference between surrender value and paid up value? ›
The special surrender value gets calculated in cases where the policyholder stops paying premiums, but the plan continues until they choose to surrender it. Once the premium payments stop, the sum assured may decrease and the lower amount is known as the paid-up value.
Is cash value life insurance expensive? ›
Expensive: Cash value life insurance is usually more expensive than term life insurance because it combines death benefit protection with an investment component. The cash value life insurance cost depends on the interest rate in the policy, age, and health of the insured, as well as other factors.
Can I add money to my cash value life insurance? ›
Cash value can be as important as the death benefit. Generally, you will see your cash value start to accumulate after the first year of the policy. The Option to Purchase Paid-Up Additions Rider allows you to buy more life insurance coverage and increase the cash value in the policy.
Can I use my life insurance to buy a car? ›
You can get a life insurance policy loan from your insurer. The cash value of your policy is used as collateral, and the loan can be used to pay medical expenses, buy a car or purchase anything else you might need. Because the insurer holds the funds to cover the loan: There are no underwriting requirements.
How much does a $500000 whole life policy cost? ›
On average, a 40-year-old with excellent health buying a $500,000 life insurance policy will pay $18.44 a month for a 10-year term and $24.82 a month for a 20-year term.
How much is a $5 million dollar life insurance policy? ›
5 Million Life Insurance Policy Cost
Term life insurance policy is the most popular. This type of life insurance makes it much more affordable to get high levels of death benefits. The average 5 million term life insurance cost could be $190 per month or $2,280 per year.
The average monthly cost of life insurance for a 10-year $100,000 policy is $11.02 or $12.59 for a 20-year policy.
How do I avoid taxes on cash value of life insurance? ›
One way to access all your cash value and avoid taxes is to withdraw the amount that's your policy basis—this is not taxable. Then access the rest of the cash value with a loan—also not taxable. If you die with a loan against the policy, the death benefit is reduced by the outstanding loan amount.
Who gets the cash surrender value of life insurance? ›
Cash surrender value is money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before maturity or an insured event occurs.
How do I know if my life insurance has a cash surrender value? ›
To calculate the cash surrender value of a life insurance policy, add up the total payments made to the insurance policy. Then, subtract the fees that will be changed by the insurance carrier for surrendering the policy.
What is the cash value of a $100000 life insurance policy? ›
The cash value of your settlement will depend on all the other factors mentioned above. A typical life settlement is worth around 20% of your policy value, but can range from 10-25%. So for a 100,000 dollar policy, you would be looking at anywhere from 10,000 to 25,000 dollars.
How long does it take to build cash value on whole life insurance? ›
How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.
Is $100 000 whole life insurance enough? ›
A $100,000 term life insurance policy is sufficient if you already have enough savings, have few financial obligations or owe little debt. It is also sufficient if you're only looking for your insurance to cover funeral costs or other specific expenses.
How much a month is a $500 000 whole life insurance policy? ›
How much does whole life insurance cost? A 35-year-old with minimal health conditions can pay about $571 per month for a whole life insurance policy with a $500,000 death benefit coverage amount.
Can cash value of life insurance exceed death benefit? ›
The cash value remains completely separate from the death benefit, and cannot be accessed by your beneficiaries, even when you die. There is one scenario where beneficiaries can access your policy's cash value: if you purchased paid-up additional insurance.
Does life insurance cash value count as income? ›
Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
Pros and cons of whole life insurance at a glance
| Pro | Con |
|---|
| Permanent protection that lasts your entire life | Significantly more expensive than term life |
| Premiums never increase | Best to take out when younger for more affordable premiums |
| The death benefit will not decrease | Your protection needs may change as your life changes |
5 more rowsUniversal life insurance is also referred to as "flexible premium adjustable life insurance." It features a savings element (cash value) that grows on a tax-deferred basis. The insurer invests a portion of your premiums.
Which life insurance builds cash value the fastest? ›
Whole life insurance is the type of life insurance that generates immediate cash value.
How to draw money from life insurance? ›
First, you can take out a loan against your policy (repaying it is optional). Loans are generally provided at lower interest rates than a bank loan, do not require credit checks, and do not affect your credit rating. Second, you can withdraw some of the funds from your cash value, either in a lump sum or in payments.
What happens if you pay more than your life insurance policy? ›
Paying more than the minimum amount increases the cash value of the policy. Keep in mind that different policies have different rules, and there are limits on the maximum amount that can be paid into a policy. You'll likely want to discuss overfunding your policy with a financial representative.
