What is life insurance with cash value? Our guide explains what you need to know before you buy a policy.
If you've been researching a life insurance policy, then you've probably come across the term 'cash value'. But what exactly does it mean and is it a good fit for you and your family? We explain.
Understanding the Cash Value in Life Insurance
The cash value in life insurance is simply what your policy is worth. It provides a savings component for the policy owner, and maintains a guaranteed rate throughout the lifetime of the policy so long as the premiums are paid. That potential growth is referred to as cash value accumulation. Cash value is also tax deferred, like an IRA or a 401(k).
What Life Insurance Policies Offer a Cash Value?
Cash value can often be built into life insurance policies that are intended to last your lifetime, or permanent life insurance policies like:
The reason these are the types of policies that will offer this benefit is because cash value accumulation takes time. For many, building enough cash value to exceed their investment can take decades. Lifelong policies can last 30 to 40 years, helping to ensure that your cash value will have time to mature.
As you may have discovered in your life insurance research, these types of policies will also have higher premiums than a term life insurance policy. This is, in part, because a portion of the premium goes toward growing the cash value. Lifelong policies can carry a guaranteed death benefit, so they can be an investment, but also help protect your family should something happen to you.
Term life insurance, which offers coverage for a specific period of time, does not have a cash value component. You'll likely have a smaller payment but this type of policy pays out only provides a death benefit without generating cash values that may be accessed when needed, subject to policy terms and conditions.
Should You Choose A Life Insurance Policy With Cash Value?
Cash value can be beneficial, but that doesn't mean that it's right for everyone. Cash value life insurance may be right for you if:
You want a life insurance policy for the long-term. Cash value life insurance can be useful for someone who can keep the policy active in the long-term, accumulating value throughout the years. If your cash flow is unstable or you aren't sure you'll want the policy after your children are grown or your house is paid, then this may not be the policy for you.
You have expendable income. Cash value life insurance is generally a benefit of a more expensive policy. If your budget is tight, then this type of policy may not be right for you at the moment.
You're interested in using life insurance as part of your investment strategy. Cash value life insurance can help you save for the future, and also help you protect your family should the worst occur. With both accumulated value and a guaranteed death benefit, this type of policy can make sense as part of your portfolio.
What Are The Benefits of Cash Value Life Insurance?
If you have a cash value life insurance policy, there are numerous benefits available to you. Here's a short list of what you can do with cash value:
Borrow against the policy. You have an option to borrow money from your policy. This means that if any needs arise - a new car, college tuition, a much needed vacation, you can borrow money from your policy to cover the costs. You do have to pay back the money with interest, though, in order to maintain the full death benefit of your policy.
Surrender the policy for its current value. You have the option, with cash value, to surrender your policy and withdraw the total cash value of your policy. If you do surrender your policy though, you will no longer have life insurance coverage.
Pay your premium. Once the value of your policy has reached a certain point, you may be able to use the cash value of your policy to pay your premium. This could be an valuable benefit if you are on a fixed income later in life, and would like to keep your policy active, but don't have much expendable cash.
To learn more about cash value and the differences between term life insurance and whole life insurance, read our guide. If you're ready to purchase your life insurance policy, request a quote.