How Cash Value Life Insurance Works
Permanent life insurance (the alternative to term life) always comes with some form of cash value. This is largely why permanent insurance is so much more expensive than term — because a portion of each premium payment gets deposited (tax-free) into that cash account. How much money gets deposited, and its growth potential over time, depends on the type of permanent life insurance you choose.
Once you’ve built up substantial cash value on your life insurance (which usually takes about 15 to 20 years), there are a few different ways you can put those funds to work for you. You can usually take a loan against the account, use it to pay premiums, withdraw up to a certain percentage, or surrender the policy altogether and take the cash value as a lump sum.
That probably sounds pretty swell. But it’s important to remember that cash value life insurance works more like a loan than a true savings account.
Because your life insurance cash account comes with tax advantages, it also comes with strings attached. In other words: Withdrawals aren’t free. You’ll either have to pay them back, surrender part of your policy’s death benefit, or face your insurance lapsing. Learn more about the ways you can and can’t use your cash value here.
Cash Value With Whole Life InsuranceWhole life insurance comes with a cash value component that earns a fixed interest rate over the life of the policy. Premiums are also level-set (meaning you’ll pay the same amount every month, as long as the policy stays in force), so your cash value returns are more or less guaranteed.
Fixed returns might make whole life insurance look particularly appealing, but it’s important to remember that those perks are tempered by steep premiums (often in the hundreds of dollars per month). If premiums go unpaid, the policy will lapse, voiding both the insurance coverage and cash value component.
We recommend learning as much as you can about whole life insurance and talking through your financial plan with a professional before purchasing this kind of coverage. Start here to learn more about whole life insurance and for whom it might be a good fit.
Cash Value With Universal Life Insurance
Universal life insurance is more flexible than whole life. Customers usually have some control over the size of their premium payments, which means they can decide to some extent how much money gets deposited into the cash account.
For instance, if you have universal insurance, you might decide to make a nice plump cash deposit after you get a yearly bonus, but pay only the minimum premiums required during tough financial times (say, while paying off unexpected medical bills).
The other big difference between whole and universal life insurance is the cash account’s growth potential. Instead of whole life’s fixed interest rate, universal life policies invest the cash into various portfolios. The returns on your policy will depend on how those investments perform.
Cash Value With Guaranteed Universal Life Insurance
Guaranteed universal life (or GUL) is a sub-type of universal life insurance. Like all permanent policies, it promises to pay a death benefit — although the fine print is a little different. Like term insurance, GUL expires at a certain date. However, that date is set far enough in the future that the policy is expected to outlive you.
The other thing that’s different about GUL? Unlike other kinds of permanent insurance, GUL puts little emphasis on cash value. The account tends to be a lot smaller. This, combined with the term-hybrid format of GUL, makes premiums much more affordable.
Due to its particularities, guaranteed universal life insurance is a good option for people who need permanent coverage on a budget. We recommend it first and foremost for senior citizens. If you or a loved one are in the market for senior life insurance, you can learn more about the benefits of GUL here.
Cash Value With Indexed and Variable Universal Life Insurance
The other major types of universal life insurance — indexed and variable — sit in two different camps when it comes to investing cash value.
With indexed universal life, the savings component is directed into a relatively stable stock index with a guaranteed minimum interest rate.
Variable universal life, on the other hand, diverts the policy’s cash value into a variety of investment accounts. Variable life insurance has the potential to offer greater growth, but it also presents a bigger risk to the policyholder’s investment because returns are not guaranteed.