Have you heard about cash value life insurance? What does cash value of life insurance mean? Is it good, bad — or maybe both? Today, we’re going to educate you on everything related to life insurance cash values. By the end of this article you should have an idea if a life insurance cash value policy is a good fit for your coverage needs.
What is cash value life insurance?
Life insurance cash value refers to the savings portion of a permanent life insurance policy. Your ears may perk up when your hear the phrase, “Cash value.”
I mean, cash is a good thing right? Well….Possibly.
You need to evaluate your coverage needs and analyze a few things to see if a cash-value policy is worth it. If not, you’re potentially throwing away your money.
which life insurance has cash value
As we briefly mentioned, cash value can be built into permanent life insurance policies. Permanent life insurance policies are a type of life insurance that is designed to provide you coverage for life.
what type of life insurance has a cash value?
Cash Value Comparisons
Let’s compare some of the most popular permanent life insurance policies and how their cash value grows.
|Whole Life Insurance||Universal Life Insurance||Guaranteed Universal Life Insurance|
|Duration||Lifetime coverage||Lifetime coverage||Lifetime coverage|
|Guaranteed Cash Value?||Yes||Possibly, UL can be reduced to pay premiums||No|
|Guaranteed Death Benefit?||Yes||Yes||Yes|
|How Cash Value Grows||Cash value builds at a fixed rate & reaches the size of the death benefit when the policy matures (typically, when you turn 100).||Based on interest rates of the market and the performance of the insurer.||N/A|
|Premiums||Level||Varies, up to the customer (subject to federal tax laws)||Level|
|Misc.||Priced the highest; Lowest risk||-||Some GUL builds small cash value; Don't ever use it or policy could lapse|
whole life insurance cash value?
Whole life insurance is the oldest type of life insurance and it’s pretty straight forward — You pay a level life insurance premium and your policy will remain in force.
That’s the simple part, but you’re probably asking, “What is cash value on whole life insurance?
The Whole Life cash value is the money that builds up in the policy over time.
does term life insurance have cash value?
Does term life insurance have a cash value component? Unfortunately, the answer is no. There is no term life insurance cash value. Term life only pays a death benefit.
cash value life insurance pros and cons
Just like every other type of life insurance — there are pros and cons. There are some things that we like and dislike about cash value life insurance. Let’s take a closer look.
What we like about cash value life insurance
Here are the advantages of cash value life insurance:
- Access: With the cash value of life insurance – a percentage of your premium payment goes to your cash value account. When your cash value grows you’ll be able to access this money. You will be able to borrow from the cash value account tax free. Term life insurance doesn’t have this feature. Every penny you spend in premiums is gone forever (unless you purchase a Return of Premium term policy). The life insurance company keeps all of your term life premiums.
- Tax-free growth: Is cash value from life insurance taxable? The cash value in your permanent life insurance policy will grow tax fee. You won’t own taxes on the money you withdraw as long as you only take out an amount equal or less than the premiums you’ve paid. When you withdraw over that amount, you’re affecting the interest that the cash has earned. You would then have to pay a tax on the difference of premiums paid and the amount withdrawn.
- Flexibility: If you are ever in need of cash for any reason, you have the flexibility to withdraw from the cash value of your policy. This can be for emergencies, to buy a new car, retirement, or even pay for the premiums of your policy. It’s important to know that you can even take out a cash value loan — but if you happen to die before paying it back, your beneficiary will receive a reduced death benefit. The reduced amount will equal the amount of the cash value loan.
- Future Proof: What happens if you buy a term life policy when you’re young and you outlive it? You’re probably going to have to buy a new policy. What will you do if you now have a health condition that would prevent you from getting a new policy? With a cash value life insurance policy — you wouldn’t have to worry because your coverage is permanent. In other words, it provides you lifetime coverage. No matter if there are any changes to your health, occupation, lifestyle or anything else that’s considered a high risk.
What we don’t like about cash value life insurance
There are some definite disadvantages to cash value life insurance – such as:
- Cost: Cash value life insurance premiums are high compared to term life insurance. A cash value life insurance policy requires a long term commitment as you will need to pay these premiums for many years.
- One or the Other: One of the misconceptions about cash value life insurance is that your beneficiaries get your cash value AND the death benefit. When you pass away, the beneficiary will get the death benefit and will not receive the cash value. When if comes to the cash value of your policy – you either use it or lose it while you’re alive.
- Poor Returns: When you compare other investments to a cash value life insurance policy – you’ll see that the policy has an overall low rate of return. It’s likely that you would make a greater return if you invested in more traditional ways — such as with stocks, mutual funds, and your 401k.
- Fees: Life insurance with cash value are packed with fees. All of these fees take away from the earning potential of your policy. There is also the possibility that you could receive a surrender charge (more on that soon).
- Interest: Sometimes people will withdraw money from their permanent policy, but don’t want to pay the surrender charge. This can be accomplished with a policy loan which will act as collateral. That doesn’t sound so bad right? Well the bad part is that the life insurance company is going to nail you with interest on the loan.
How do I withdraw cash value from a life insurance policy?
Here are the Top 4 ways to withdraw the cash value from a life insurance policy.
1. Cash Value Withdrawal
You can take advantage of a tax-free cash withdrawals. You just have to make sure you only withdraw up to the amount you’ve paid in total premiums. If your withdrawal goes over that amount, it will be taxed as income. Also, unless you pay the withdrawal back, your death benefit will be reduced by the amount that you took out.
2. Policy Loan
Another great way to take advantage of tax free cash is with a policy loan. You can borrow against your cash value life insurance policy without having a credit check! The downside is that you will have to pay interest. This can be somewhere in the range of 4-8% depending on your policy and market rates. Make sure you pay the entire loan. If you don’t or only pay a portion – the balance is going to be deducted from the policy’s death benefit.
3. Pay your premiums with cash value!
You may have the option to stop paying the premiums on your policy and use the cash value of your policy to pay for them. There is a bit of risk involved. If you drain the funds in your cash value account completely, it may cause your life insurance policy to lapse. In other words, it would end your life insurance coverage entirely.
4. Surrender the policy
You have the option to surrender your cash value life insurance policy. This is another way of saying you’re cancelling your policy. With the life insurance cash surrender value — you will get back the amount that is in your cash value account, but any loans or unpaid premiums will be deducted before you receive your money.
Cash Surrender Value
What is cash surrender value for life insurance? We keep mentioning it, so let’s go over what you need to know.
You may have received a life insurance quote or illustration that shows cash surrender value and cash surrender charge. The image below shows an example of cash surrender value of life insurance balance sheet. It shows the early years of a UL policy, the surrender values and charges.
(Click on the image below to enlarge)
The cash value and the cash surrender value of life insurance are essentially the same thing. The major difference between cash value and surrender value is if you cancel or “surrender” the policy.
When this happens, you will get the cash value that has grown (minus any surrender chargers). The surrender charges are laid out by the life insurance companies and can be seen in your illustration and policy.
Note that there is a surrender charge in the sample illustration above. The surrender charge is when you must pay if you sell or take out money from the policy during the surrender period.
The surrender period is the time that the policy owner has to wait before they can get the cash value of the policy when canceling (surrendering).
What happens when the policyholder surrenders the policy prior to the end of the surrender period?
They probably will not get any amount of the policy’s cash value. The reason is that the insurance companies front load many of their fees when they set up your policy. A big portion of your early premiums pay for these costs and fees.
should i get cash value life insurance?
For most people, a basic term life insurance policy will provide the most coverage at the lowest cost. However, a cash value life insurance policy is a better option for certain situations.
Cash value life insurance will cost more than term life. The first issue to address is can you afford the permanent policy’s premiums. These policies are for the long haul. There’s no sense buying a policy only to let it lapse in 5 – 10 years.
For high net worth individuals, cash value life insurance provides many positives. Permanent policies are excellent when you’ve maxed out and diversified all the traditional investment strategies. Cash value life insurance is just another piece of the puzzle when putting together a diversified portfolio.
Permanent life insurance can be extremely helpful with estate planning and avoiding estate taxes. This provides a means of covering your debts so most of your assets will end up with your loved ones.
If you’d like to learn more, be sure to read about the best cash value life insurance companies. Do you have any specific questions? Give us a call at 888-411-1329. We’d be happy to answer your questions and help you find the best life insurance policy for your specific needs, health, and lifestyle.