Updated August 7, 2019

Cash Value Life Insurance Pros and Cons


Cash value life insurance provides lifelong coverage while growing in value over time. But it isn't the right coverage for everyone. Read on to find out why.

What Is Cash Value Life Insurance?

Cash value is one feature of permanent life insurance policies like whole, universal, or variable life. These types of coverages last as long as you pay your monthly premiums.

A portion of those premiums pay off the death benefit, while another portion goes into the cash value account. This account acts like an investment component and grows over the life of the policy. It grows tax-deferred, so you won't pay taxes.

The cash value can be:

  • Borrowed against in the form of a loan
  • Used to pay monthly premiums
  • Withdrawn in the form of cash

Cash value is different than the death benefit.

When you die, your beneficiaries receive the death benefit. But the insurer keeps the accumulated cash value.

If you surrender your policy, or end your coverage, you lose the death benefit but the cash value accumulation is returned to you.

What Types of Insurance Have Cash Value?

Whole Life Insurance

  • Guaranteed cash value
  • Fixed monthly premiums
  • Grows at a low fixed rate set by the insurer
  • Designed to match the death benefit when the policy matures (usually around age 100)

Universal Life Insurance

  • Cash value growth not guaranteed
  • Growth fluctuates, but guaranteed minimum interest rate set by the insurer
  • Monthly premiums vary but minimum and maximum are set; policyholder chooses amount in between

Indexed Universal Life Insurance

  • Cash value growth not guaranteed
  • Value fluctuates based on performance of an index, such as S&P 500 or NASDAQ 100
  • Policyholder chooses where to allocate funds from fixed or equity index accounts supported by the insurer
  • Monthly premiums vary but minimum and maximum are set; policyholder chooses amount in between

Variable Life Insurance

  • Cash value growth not guaranteed
  • Value fluctuates after being invested in portfolios offered by the insurer, similar to stocks or mutual funds
  • Fixed monthly premiums

What about term life insurance?
Term life offers a death benefit but no cash value component. Unlike permanent policies, term life lasts for a set period—only 10, 20, or 30 years. And you can't borrow against a term policy via a loan or withdraw any cash value.

But a term policy is much cheaper—as much as 10 times—than a permanent policy.

What Do You Do With Cash Value?

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Your options depend on the cash value amount and the type of life insurance policy. Read on to learn how you can use that cash value.

Pay Monthly Premiums

With universal and variable policies, you have the option to pay your monthly premiums using the accumulated cash value.

You must keep track of the cash value to make sure it doesn't reach $0. If it isn't sufficient to pay the premium, your policy will lapse and you will lose coverage.

Whole life insurance policies do not offer this option unless you convert to a paid-up policy (more on that below).

What Is 7702 Life Insurance?
This is another term for permanent policies that have a cash value component. This simply means that the policy is compliant with section 7702 of tax regulations for life insurance.

It was created to prevent other investment vehicles from taking advantage of those same tax benefits.

Increase Death Benefit

Some insurers offer paid-up additions with whole life policies. When the cash value is large enough, you can use it to pay your premiums.

One downside: Each payment is deducted from the policy's death benefit. That means if you have a $500,000 policy and pay $5,000 per year in premiums, your death benefit will decrease by $5,000 each year.

  • Year 1: $495,000
  • Year 5: $475,000
  • Year 10: $450,000
  • Year 20: $400,000
  • Year 30: $350,000

Take Out a Loan

When you take out a loan against your policy, you are using the cash value as collateral. You can use the loan to:

  • Pay bills
  • Buy a car or house
  • Other needs

The loan has no additional underwriting requirements. There's also no credit check, so it won't appear on your credit report.

You can have the loan as long as you want, though interest will be charged by the insurer. If you die before paying it off, the value of the loan will be subtracted from the death benefit given to your beneficiaries.

To take out a loan against your policy, most insurers require you to fill out a form (often found on their website).

Keep in mind: If the size of the loan is greater than the policy's cash value, your insurance will lapse and you will lose coverage.

Surrender Your Policy for Net Cash Value

If you no longer need your life insurance policy, you can surrender it and collect the net cash value. Simply let your insurer know you want to surrender your policy, and they will pay you.

The net cash value may be lower than your accumulated cash value because some insurers charge surrender fees or other charges. It's best to wait 10–15 years after beginning the policy before you surrender it.

That way, the net cash value has had a longer chance to grow and reach the total accumulated cash value.

Make a Partial Withdrawal

If you don't want to surrender your policy, but perhaps have less need than when you purchased it, you can withdraw a portion of the cash value. However, by doing so, you reduce your policy's death benefit.

Partial withdrawal works differently for various types of permanent life insurance:

  • Variable and Universal Life
    You receive a portion of the death benefit early. This means the payout to your beneficiaries after you're gone will shrink by the amount you take out.

    As long as you don't withdraw more money than you've paid in premiums, you won't have to pay taxes. Otherwise, the withdrawal will be taxed as income.

  • Whole Life
    The insurer will usually reduce the death benefit more than the amount that you withdraw. For this reason, it's generally not recommended to partially withdraw from a whole life policy.

Here are some situations where a permanent cash value insurance policy would be right for you:

  • If you'd like to leave an inheritance to your beneficiaries, but want to spend your retirement savings.

  • If you have a disabled child who will require lifelong care or financial support.

  • You want lifelong policy coverage that has a cash value and/or investment component that can grow over time.

In general, you may be better off investing in stocks, bonds, mutual funds, or indices on your own. You'll avoid fees and likely see a higher (and faster) return on investment. Consult a financial advisor for help deciding what's best for you.

Downsides of Cash Value Life Insurance

There are several reasons to avoid cash value insurance. These include:

Cost
Cash value life insurance is significantly more expensive than term life insurance. Here is a comparison chart of monthly premiums for a $250,000 death benefit for a generally healthy non-smoker.

Age20-Year TermWholeUniversalVariable
30-year-old male$14.57$165.83$88.68$126.12
30-year-old female$13.31$134.25$75.12$99.00
40-year-old male$19.67$229.41$125.68$180.50
40-year-old female$17.99$222.00$106.68$160.44
50-year-old male$47.68$357.42$197.44$292.00
50-year-old female$34.46$335.17$169.22$270.67

Complexity
Cash value insurance is more complicated than traditional term insurance. Have a life insurance agent or financial planner assist you with selecting the right policy and explain your options. They can help you understand the cash value and investment components.

A whole life policy is the most straightforward cash value insurance since it has no investment portion and grows at a guaranteed rate.

Risk on Investment
The decision to purchase a cash value insurance policy depends on the amount of risk you want to take. The growth of the cash value often depends on circumstances out of your control, like with universal life. You could be taking a chance with your invested dollars.

Variable life policies have the potential to grow much more rapidly than other policies—if you're willing to take the risk.

Bottom Line

Most forms of permanent life insurance offer cash value, including whole, universal, and variable life. As the money grows with interest over time, you can also cash in the policy for some extra dollars in your pocket.

Cash value insurance is not recommended for most people due to its drawbacks. If you do choose one of these policies, make sure you read the policy carefully to understand what you're buying, how it works, and what nuances may lie within the fine print.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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