Cash Value Life Insurance: How It Works

Updated: July 7, 2022

Nobody likes to think about their mortality. Yet, about two-thirds of people with life insurance say they feel financially secure, according to a study by the Life Insurance Marketing and Research Association (LIMRA). Policies offer important benefits like providing money for funeral expenses, end-of-life care, beneficiaries — and in some cases, they also have cash value.

What is cash value life insurance?

Cash value life insurance is a permanent life insurance policy in which a portion of your premiums accumulates interest and grows in value over your lifetime. Cash value usually starts accumulating after you’ve held the policy for two to five years.

Whole, universal, variable universal and indexed universal life insurance are all types of permanent policies with cash value.

How does cash value life insurance work?

Similar to term life insurance, your cash value life insurance policy will pay death benefits to your beneficiaries when you pass away. But unlike a term policy, which doesn’t have cash value, you can borrow against the policy, withdraw money for a large expense or use the cash value to pay premiums.

What are the advantages and disadvantages of cash value life insurance?

Drawbacks include higher premiums relative to term life insurance, slow cash value growth and the potential for negative consequences such as income taxes or policy lapse if you don’t use your cash value carefully. Withdrawing a portion of your policy’s cash value may involve fees and will reduce the death benefit your beneficiaries receive when you pass away.

Advantages of cash value life insurance are that it can provide greater financial security, supplemental retirement income (especially in a bear market), tax-deferred gains and death benefits that don’t expire.

Contact us if you have any life insurance questions or need help interpreting your policy. We’re always happy to help.

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