Is cash value life insurance better, or should you opt for term life coverage?
With so many options available for life insurance policies, it can be challenging to decide which policy is suitable for your needs and budget.
Do you want a fixed or variable rate? And then insurers throw in terms like “cash value,” which leaves you wondering what life insurance policy is the best choice.
However, learning a little more about your options when deciding on your life insurance policy can help ease your family’s minds about the future.
With cash-value life insurance, you get coverage for the entirety of your life, and you can earn money through a tax-deferred cash-value savings account.
Let’s take a closer look at what cash-value life insurance is, how it works, the different types available, and if it is the best option for you.
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What Is Cash Value Life Insurance?
There are different types of life insurance policies available, one of them having a cash value similar to a savings account for the policyholder.
Cash-value life insurance is a type of permanent life insurance that grows and accrues cash-value savings for the entirety of your life.
The cash value earned, such as interest or other investment gains, is tax-deferred, meaning your life insurance policy will grow quicker since it’s not being taxed each year.
However, not all of your payment earns interest. With this type of life insurance, your premium payment is split into three areas, the cash value, the cost of insuring the policyholder, and policy fees.
How Cash Value Life Insurance Works
How Cash Value Life Insurance WorksLife insurance that builds cash value has a larger premium payment than term life insurance simply because of the savings component. Plus, your insurer ensures you for the rest of your life versus a term of 10, 20, or 30 years.
The cash value account is typically invested in a conservative-yield investment but can vary depending on the type of policy you purchase.
So, as you pay your premium payments on the policy, you earn more interest, and, therefore, while you are alive, the cash value inside your life insurance becomes more significant year after year.
Early in your policy, more of your premium payments are placed in your cash-value account, allowing your savings account to grow quicker.
The savings feature is the primary reason cash value policies are more popular for younger and middle-aged people.
As you grow older, the cash value accrued slows down since more of your premium payment goes to the cost of insuring you.
This is because it costs more to insure policyholders as they get older. Life insurance companies often refer to this as your cost of insurance (COI).
Using Your Policies Cash Value during your life
Using Your Policies Cash Value during your lifePolicyholders with a life insurance asset can use their accumulated cash values in a few different ways.
With a considerable cash value built up from your policy, you can use this money to help pay for your premium payments.
However, the principal reason for investing in life insurance is that you can borrow the accumulated cash values after paying premiums on your policy for several years.
Taking out a loan against your life insurance policy does not interrupt the compounding interest inside your policy, which is an essential difference from completing a withdrawal.
The Infinite Banking System and Life Insurance Retirement Plans advocate using policy loans to pay for significant living expenses or provide retirement income.
Of course, if you have a financial emergency and need cash, you can withdraw some money from the cash value account without surrendering your policy.
Policyholders who want to cash out their existing life insurance policy will receive the net surrender value of their cash value account from their insurer.
Cash Values at Death
What happens to your accumulated cash values with a universal or whole life insurance policy at death?
According to Forbes Advisor, it’s important to point out that with a cash value component, a policyholder’s beneficiaries would not receive a cash value payout upon death.
Instead, any remaining cash value in your life insurance policy goes to the insurer, and your beneficiary will get the death benefit.
This is why high cash-value life insurance is not recommended for seniors because they may not see the benefits of the savings component.
Instead, many seniors should look into universal life policies that will not build up significant cash values and offer a no-lapse guarantee.
A no-lapse guarantee means as long as you pay, your premium will remain active until you pass away.
Cash Value Whole Life Insurance
Cash Value Whole Life Insurance Whole life insurance is the most common type of permanent life insurance policy. Your premiums are at a fixed rate with whole life insurance, meaning they never increase or decrease, so you will always know your payment amount.
With your premium payment at a fixed rate, you will not have to worry about an increased cost as you grow older.
Plus, limited pay whole life can be paid up over only a few years while your death benefit continues for a lifetime.
The cash value savings account and dividends with a whole life insurance policy grow based on the calculations provided by the insurance company, which are related to the market’s current interest rates.
Whether your contract is non-participating or participating specifies whether you receive any dividends.
- Non-participating policies do not pay any dividends and therefore offer lower premiums.
- Participating policies pay tax-free dividends that can be applied to your whole-life policies premiums or cash value.
People interested in cash-value life insurance should buy participating policies, while senior citizens needing only a tiny policy should purchase non-participating coverage.
For whole life insurance, applicants should consider how long they want to pay for their policy and how the eventual dividend accumulations should be paid.
- Payment period – Policyholders can pay for their entire policy in a shorter time frame by paying more significant premiums. With a paid-up life insurance policy, the cash values will continue making premiums on your policy even after your initial payments stop.
- Dividend crediting –Dividends can be taken in several forms, with the policyholder modifying how they are received. Cash payments can be made each year, or the dividend may also be applied to help pay for the policyholder’s annual premiums to reduce the cost of the policy.
Cash Value Universal Life Insurance
Cash Value Universal Life Insurance Universal life insurance is a form of permanent coverage that offers coverage for your entire lifetime.
Universal life insurance is also called adjustable life insurance because it allows you to increase payments for higher cash values or lower costs to provide only a death benefit.
The savings account with a universal life insurance policy grows based on the greater value of the market’s current interest rates or the minimum interest rate.
Types of cash value universal life
- Guaranteed universal life insurance – A GUL policy ensures a death benefit payout and uniform premium payments throughout the policy.
- Indexed universal life insurance -IUL is a type of permanent life insurance that pays interest based on the stock market’s movements. Indexed universal life policies provide more significant upside potential, flexibility, and tax-free gains.
- Variable universal life insurance –VUL is a type of permanent coverage that includes a cash value, investment options, flexible premiums, and a flexible death benefit. Like most permanent policies, VUL offers life-long protection that will stay in place as long as you live and pay premiums.
Life Insurance Cash Value Chart
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Buyer Tip:
If you are interested in high cash value life insurance, the best policies are whole life, indexed universal life insurance, and variable life insurance.
Conversely, guaranteed universal life is better for lifetime protection at a much cheaper cost.
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Cash Value Life Insurance Pros and Cons
Is a Cash Value Insurance Policy Right for You?
Advantages of cash value life insurance
- Most importantly, cash-value policies offer lifetime death benefits to your beneficiaries whenever you pass away.
- You will never have to requalify for coverage as you grow older with permanent life insurance.
- All cash values are tax-deferred, acting as forced savings accounts for policyholders.
- The cash accumulated in your policy can provide money for an emergency or retirement income when you withdraw or borrow from your policy.
- Cash-value life insurance is not listed as an asset when you apply for college financial aid.
disadvantages of cash value life insurance
- If the policyholder passes away before the cash value is used, the accrued amount goes back to the insurer instead of the beneficiaries.
- The death benefit is reduced if you take out a loan on your cash value and are not paid back before you die.
- Cash-value life insurance is considered conservative. Many financial advisors do not recommend this type of life insurance as an investment unless your other contributions, like IRAs and 401(k)s, are maxed out.
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Buying Cash Value Life Insurance
Buying Cash Value Life InsuranceAffordable Life USA can help walk you through the many life insurance options and guide you in the right direction.
We can find the best coverage based on your needs, financial situation, and the amount of risk you want to assume.
Our goal is to match you with the best insurance company for accumulating significant tax-deferred savings in your policy’s cash value account.
Here is a comprehensive list of our companies offering the most distinguished ratings from the Better Business Bureau, AM Best, and J.D. Power.
Insurance Company Ratings Chart
| COMPANY | BBB | AM Best | JD Power |
|---|---|---|---|
| AIG | A+ | A | 718 |
| AXA Equitable | A+ | A+ | 752 |
| Banner Life | A+ | A+ | N/A |
| Brighthouse | A+ | A+ | N/A |
| Guardian Life | A+ | A++ | 760 |
| John Hancock | A+ | A+ | 739 |
| Lincoln Financial | A+ | A+ | 744 |
| Mass Mutual | A+ | A++ | 780 |
| Metlife | B- | A+ | 780 |
| Mutual of Omaha | A+ | A+ | 766 |
| Nationwide | A+ | A+ | 806 |
| Pacific Life | A+ | A+ | N/A |
| Principal Financial | A+ | A+ | 774 |
| Protective | A+ | A+ | 742 |
| Prudential | A | A+ | 770 |
| SBLI | A+ | A+ | N/A |
| Transamerica | A+ | A+ | 720 |
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Affordable Life USA is dedicated to providing comprehensive life insurance solutions to families and business owners throughout the United States.
For over thirty years, our agency has provided a platform for comparing hundreds of life insurance policies without the stress of high-pressure sales tactics.
Our experienced team of financial planners has helped thousands of clients obtain affordable coverage through our efficient online application process.
Our founder, Eric Van Haaften, expanded our consumer-centric sales model nationally by leveraging the influence of renowned publications such as Time, Newsweek, and The Wall Street Journal.
Eric acquired his love for quantitative analysis while getting his business degree from Ferris State University, which provided a solid foundation for his analytical approach to financial planning.
Eric Van Haaften, LUTCF
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