Cash value insurance is life insurance that has both an insurance component and a savings component. It provides life insurance protection for your family in the event that you suffer an untimely demise, but it also accumulates a cash value over time.

Although you pay one premium for the total insurance policy, only part of that premium is used to pay for the insurance coverage you have purchased. The remaining part of the premium goes toward the investment savings. This savings portion of the policy is invested in one or more investment vehicles (stocks, bonds, mutual funds, etc.) that you have either selected yourself or given the insurance company authority to select for you. In either case, the investments chosen will generally provide a better rate of return than a typical bank savings account. What’s more, the cash value of your policy can usually be accessed if you need money in the form of a loan.

Who should consider cash value life insurance?
People with long-term coverage needs
Cash value insurance is well suited to cover long-term needs, because coverage continues for the rest of your life. You won't need to renew your policy periodically, nor will you need to provide proof of insurability once the policy is in place. Some cash value insurance also allows you to lock in a premium schedule, so you won't have to worry about the rising costs of insurance as you get older or if your health deteriorates.

Advantages of cash value insurance

Life insurance protection
As with any life insurance policy, one of the main strengths of cash value insurance is that it can provide adequate financial resources for your surviving loved ones in the event of your premature death. Knowing that this protection is in place allows you to sleep a little easier at night.

Lets you make money on your money
In addition to life insurance protection, cash value insurance can give you a return on your money (assuming that sound investment choices are made for the cash value portion of the policy). Insurance that lacks the cash value feature, such as term insurance, doesn’t offer such investment opportunities.

Cash value grows tax-deferred
A cash value policy is similar to an annuity in this respect. All the interest and earnings on the policy’s investments are allowed to grow free of income taxes until you surrender the policy or begin to withdraw your funds. Depending on investment performance, this "tax shelter" can enable you to accumulate a substantial nest egg in your cash value policy over a period of years.

Allows withdrawals from cash value
Depending on the exact type of policy you have, you may be able to withdraw a portion of the cash value in your policy. A withdrawal from a cash value policy is similar to a withdrawal from a bank savings account and almost as easy to make. As long as you maintain enough cash value in the policy, you can make withdrawals and still keep the life insurance protection in effect at your desired coverage level. What’s more, policy withdrawals may be tax-free up to your basis in the policy (the amount you have paid into the policy in premiums). As long as the policy fits the IRS definition of insurance, only the earnings will be taxed upon withdrawal.

Allows loans against cash value
You can also take loans against your policy using the accumulated cash value as collateral. The interest rate is determined in advance and is often lower than the rates banks offer. If you die before the loan is repaid, however, the death benefit proceeds will generally be reduced by the amount of the outstanding loan balance.

Diverse investment choices
You typically have a wide range of investment choices available for the cash value portion of your policy, whether you pick the investments yourself or leave the choice to the insurance company.

Disadvantages of cash value insurance

Premiums more expensive than term life premiums
The premiums for cash value life are usually more expensive than for a comparable amount of term insurance. The reason is that, with a cash value policy, you are paying for both insurance and the savings component of the policy. With a term life policy, you are simply paying for straight life insurance.

Cash value contributions may be limited
Because the cash value grows tax deferred, the federal government has passed laws and issued regulations limiting the amount of money that can be invested in cash value life insurance policies. This is a very technical area, so you should consult additional resources for more information about the limits on what you’re allowed to invest.

Underlying investments subject to fees and potential losses
The underlying investments in a cash value policy expose you to the possibility of financial loss as well as of financial gain. It all depends on how those investments fare. In general, any losses will cut directly into your cash value. The investments are also subject to management and administrative fees.  However, any such loses would not effect the policy's death benefit.

What can you use cash value insurance for?
Like any life insurance policy, the primary purpose of cash value insurance should be to provide life insurance protection for your family. Beyond that, cash value insurance can be put to other uses because of its unique savings element. You can, in fact, use it much as you would use your other investments. The tax-deferred growth of your cash value makes this type of insurance a good way to save for major financial goals such as retirement, starting a business, and funding your children’s education.

Learn More...

Life Insurance Overview | Understanding The Basics | Term & Cash Value
Coverage Amounts | Reading Policies | Planning Concerns | Life Calculator | Life Glossary

Please Note: The information contained in this Web site is provided solely as a source of general  information and resource.  It is a not a statement of contract and coverage may not apply in all areas or circumstances.  For a complete description of coverages, always read the insurance policy, including all endorsements.