Cash Value Life Insurance Policies: What Is a Cash Value Life Insurance Policy?

Key Takeaway

Cash value life insurance policies are policies that offer the potential to grow cash value apart from the protection component of the insurance policy. The cash value component is usually found in permanent life insurance policies. Term life insurance policies don't typically offer cover cash value components. It is important to always check with insurance providers on which policies they offer that include cash value accounts. This cash value has the potential to grow over time. There are several types of cash value insurance policies and ways to access the money, including through a withdrawal or a loan. Whether you'll be able to access the cash tax-free is dependent on the type of insurance policy you have and how much money you have paid into the policy versus how much you’d like to take out. Before choosing a cash value insurance product, you should thoroughly review the policy details and speak with a trusted advisor or life insurance agent as to whether or not this type of policy may be a good fit for you.

A scale weighing a piggy bank and a feather- representing Cash Value Life Insurance
A scale weighing a piggy bank and a feather- representing Cash Value Life Insurance

Types of Cash Value Life Insurance Coverage

A cash value life insurance policy can offer several options to the policyholder, because there are multiple ways policies can accrue cash value. However, it’s important to note that a life insurance product that builds cash value may not suit your unique needs and life goals. A policy's cash value can have certain criteria around it that can impact your ability to take out loans from the cash value account, how you can access those funds, and interest rates around cash borrowed from the account. It’s important to discuss all your insurance policy options with a trusted financial advisor.

Universal Life Insurance Policies

Universal life insurance policies generally allow policyholders the ability to adjust the value of their premium insurance payments, but this may impact policy coverage and the insurance rate. One benefit of universal life insurance is that if your life hits unpredictable circumstances or your needs change, you can usually adjust your insurance premium while still maintaining some amount of policy coverage and any accumulated cash value.

Life insurance that builds cash value can come in handy, as you may use the cash value of your policy to make your insurance premium payments, or pay other expenses if needed such as a home mortgage or to pay off loans. Some policyholders may use the policy's accrued cash value to fund other auto loans, business loans, and home expenses.

Whole Life Insurance Policies

This type of cash value life insurance is permanent, lasting the entire lifetime of the policyholder–as long as the insurance premiums are being paid regularly. In this type of insurance policy, the cash value can increase over time. Additionally, the death benefit remains guaranteed (based on the claims-paying ability of the insurer). Unlike with universal life insurance, the premiums for these coverage plans are fixed.

Indexed Universal Life Insurance Policies

When you purchase an indexed universal life insurance (IUL) policy, your cash value accumulation potential is tied, in part, to a particular stock market index. How the index performs will help determine the growth of your cash value and the amount of index interest credited. However, it is possible that the index will be negative in a period resulting in no index interest earned on your cash value accounts. Because it is a fixed insurance product and not an investment, policyholders do not experience a loss as a result of negative index performance. It is important to note that this policy is not an investment and it is not possible for customers to invest directly into an index. Life insurance companies manage the index, which is why customers can't invest directly into the fund.

While greater risks can result in greater potential rewards, it’s still advisable to understand whether or not a policy  you are considering offers a guaranteed minimum interest rate. Again, you should speak with a financial advisor or an insurance agent to fully understand how an IUL product might work.

Variable Universal Life Insurance Policies

In a variable universal life insurance (VUL) policy, your cash value is directly invested in mutual fund-like subaccounts. These insurance policies tend to include higher risk because the cash value will increase or decrease depending on how the chosen subaccounts are performing.

This coverage may be a good fit for life insurance policyholders who are experienced in investing, have room to take risk, and have more time to grow their account’s cash value.

Term Life Insurance Policies

Term life insurance is not included in the list of cash value policies for life insurance. A term insurance policy does not accumulate cash value. A term insurance policy only provides a death benefit if the insured person passes away while the policy is in effect. Term Life Insurance is generally less expensive than universal life insurance due to its fixed term and inability to accumulate cash value.

How Cash Value Life Insurance Policies and Premiums Work

    A cash value insurance policy can provide lifelong coverage, just like other forms of life insurance coverage. When the insured person eventually passes, the death benefit is paid out to the beneficiaries, provided the policy is in good standing and premiums are up-to-date. The policyholder’s cash value is usually paid out as part of the death benefit to the beneficiaries. Before the insured person passes, it’s important to understand why paying life insurance premiums matters. When the policyholder pays their life insurance premium, the payment goes towards the protection component (the death benefit), the savings component (the cash value), and towards the life insurance company’s policy charges and fees. This means only a certain portion of the insurance payment goes into that cash value component. 

    The Four Ways to Access Your Life Insurance Policy’s Cash Value

    If the insurance policyholder needs to access their cash value before their death, they can do so provided they meet the life insurance company’s criteria. For example, policyholders may take a loan on the cash value to help pay a mortgage on their first house or help pay expenses on their first business. In many cases, withdrawing cash from cash value may be a better option than taking out new lines of credit or applying for new loans. You should carefully evaluate the terms of your insurance policy when considering taking a loan or withdrawal from your policy.

    There are four main ways you can access the cash value of your insurance policy:

    Pay Your Life Insurance Premiums Using Cash Value

    If you’re experiencing financial hardship but don’t want to sacrifice your life insurance by missing payments or lapsing your life insurance policy coverage, you may be able to use the cash value of your policy to pay your monthly insurance premiums. 

    This can create some financial relief for you if you are in a pinch, but do not fully deplete the funds in your cash value account. If your cash value account hits zero, your policy may lapse depending on the details of your insurance policy.

    Surrender Your Cash Value Life Insurance Policy

    In dire situations, policyholders can sometimes cancel or ‘surrender’ their life insurance policies. By doing so, policyholders may be able to receive the cash value of the insurance product, minus any outstanding loans, the surrender charge and other fees or expenses. It’s important to know that surrender insurance charges vary widely from business to business, so understanding the surrender charge before you purchase a policy is important. It is also important to understand any potential tax consequences when canceling a policy by discussing with your tax advisor.

    Make a Cash Withdrawal from Your Life Insurance Policy

    Policyholders may be able to make a tax-free withdrawal from their life insurance policy as long as the withdrawal amount does not exceed the amount they’ve paid into the cash-value portion of the insurance policy. If the life insurance withdrawal exceeds the cash values of the account, it may be taxed as income and may also lessen the benefit amount that is paid out in the event the insured passes away.

    Take Out a Life Insurance Policy Loan

    A life insurance loan can include the portion of your paid premiums that go towards your cash value account, as well as the accrued interest from those funds. You can use this cash for anything you want, but the insurance loan will accrue interest until you have paid it back in full.

    Can You Access the Cash from Your Life Insurance Policy Tax-Free?

    If you have a universal life policy, you can typically take cash withdrawals from your policy’s cash value. You can take cash withdrawals up to the premiums you pay tax-free without impacting the policy’s death benefit. Bear in mind–if you exceed the amount you’ve paid into the account, the cash could be taxed as income. It’s important to discuss this process with a tax professional before you decide to withdraw money from an existing life insurance policy.

    Will Withdrawing Cash Value Impact the Life Insurance Policy's Death Benefit?

    When you withdraw cash from your life insurance policy, it can reduce the protection for your loved ones or beneficiaries. Depending on the policy & the insurer, cash value withdrawals may or may not have an impact on the policy's death benefit. In some cases, cash withdrawals can result in ending your policy, depending on the amount of cash you’ve withdrawn.

    If you want to avoid negatively impacting the death benefit, be sure to consult with your insurer about the terms of your policy and withdrawing from the cash value account. Also, keep in mind that some insurance policies include penalties for withdrawing from the cash account, which may also impact how much you can actually access upon withdrawal.

    Related Articles:

    1. What is Guaranteed Acceptance Life Insurance?
    2. What is Index Universal Life Insurance? IUL

    The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company. 

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    Article Author: Meredith Bell
    Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

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