June 25, 2019

Cash Value Life Insurance

Read more about Life Insurance

Is cash value life insurance a good investment? Read this review to learn about policy benefits, what happens when you die and pros and cons.

What Is Cash Value Life Insurance?

Cash value life insurance means the policy includes a savings component. It does double duty by providing a death benefit and building monetary value. This feature is only available with permanent life insurance.

Permanent life insurance lasts a lifetime and provides benefits while you are living and when you're gone. Keep reading to learn more, including the types of permanent life.

So, where does this cash value come from? Let's take a look at how a permanent life insurance policy builds cash value:

Zoe is 25 years old. She buys a cash value life insurance policy with a $1 million death benefit. Each month, she pays the premium amount due.

From that monthly amount, the life insurance company:

  • Takes out a portion for its fees

  • Allocates part of the amount to the policy's death benefit

  • Puts the remainder toward the policy's cash value

  • The cash value is then invested in the policy's savings component

  • The cash value increases or decreases depending on the performance of the investment fund selected

  • The cash value also earns interest over the years

At age 65, Zoe decides to retire. Her life insurance policy's cash value has grown to $750,000. She can withdraw some of the cash value or apply it to lower her premium payments.

Not all cash value life insurance policies build cash value the same way. Depending on the policy type, the savings component might be:

  • A low risk, low interest savings account that offers a guaranteed cash value
  • A fluctuating, but stable account based on current index fund rates or
  • An investment account that mimics the performance of mutual funds, stocks, bonds, etc.

Think of cash value life insurance as an investment fund including within your life insurance policy.

What Are the Advantages of Cash Value Life Insurance?

Throughout Your Life
The cash value can be used in several ways depending on your needs. You can:

  • Borrow against the cash value like a loan. There's no credit check, very low interest, and you're paying yourself back.

  • Withdraw it and use the money for an emergency or other expenses. If the withdrawal amount is less than or equal to the cash value you paid in, your withdrawal is tax-free.

  • Use the accumulated cash value to pay future premiums.

  • Withdraw the cash value to supplement your retirement income.

  • Increase the policy's death benefit amount if the cash value exceeds it. This allows you to leave more money to your loved ones when you're gone.

A policy's cash value accumulates tax-free.

When You Die
This is when the death benefit part of your policy kicks in. It can be used to pay:

  • Your funeral and burial costs
  • Any debts outstanding after you die
  • Living expenses for your loved ones to replace your income

What Are the Disadvantages of Cash Value Life Insurance?

Most of the disadvantages of cash value life insurance are associated with costs and coverage limitations. Among them:

  • High administrative fees and service fees for managing investment accounts

  • High premiums when compared to term life insurance

  • The interest rates earned on the cash value are usually less than other investment vehicles.

  • If you take out a loan against the policy's cash value and don't pay it back before you die, the death benefit is reduced accordingly.

Managing Your Cash Value
If your policy's cash value exceeds the death benefit, you need to take action. Here's why:

When you die, your beneficiary only receives the policy's death benefit. If the policy's cash value amount is more than the death benefit, it goes to the insurance company.

To prevent this, either withdraw the cash value or check to see if your policy allows you to use the cash value to increase your death benefit. This way, your loved ones receive more inheritance.

Which Policies Offer Cash Value?

There are two forms of life insurance: permanent life and term life. Only permanent life insurance provides cash value.

Permanent life insurance has four types: whole, universal, variable, and variable universal. The main difference between them is how the policy builds cash value.

  • Whole Life Insurance
    Has a guaranteed cash value. No matter how the stock market performs, your policy will earn a fixed interest amount.

    Whole life also has a fixed death benefit and policy premium. That means they cannot be adjusted if your needs change.

  • Universal Life Insurance
    Guarantees a minimum cash value rate. However, the cash value can increase depending on money market rates.

    Universal life offers flexible death benefit and premium amounts. You can increase or decrease them based on your needs.

  • Variable Life Insurance
    Has no guaranteed cash value. However, you have the option of selecting a fixed investment option or customizing your own investment plan. Investment options include stocks, equity funds, bonds, and money market funds.

    Variable life offers flexible premium amounts and a guaranteed minimum death benefit. The amount of the death benefit is tied to the performance of the policy's cash value.

  • Variable Universal Life Insurance
    Has no guaranteed cash value. You invest your policy's cash value in investment options of your choosing. You can select from stocks, equity funds, bonds, and money market funds.

    Variable universal life has a flexible death benefit and adjustable premiums. This allows you to increase or decrease both according to your needs.

    For example, if your children are grown and the mortgage on your home is paid off, you may not need a $1 million death benefit. You can decrease it and, in turn, decrease your premium amount.

How Does Cash Value Life Insurance Differ From Term Life Insurance?

Unlike permanent life insurance options like cash value life, term life only provides a death benefit. Its coverage is offered for fixed periods, such as 30 years, 20 years, 15 years, and 10 years. That coverage expires when the selected term ends.

Here are the other differences between cash value and term life insurance:

  1. A term life insurance policy does not build cash value. It provides a death benefit only. Cash value provides both a death benefit and a savings vehicle.

  2. Term life insurance only pays out if you die within the policy's term. With cash value life insurance, you can withdraw the policy's cash value, borrow from it like a loan, or use it to reduce your premiums.

  3. Term life is temporary insurance. It insures the individual for a certain period of time. When the term expires, the insurance coverage ends. Cash value insurance is permanent and does not expire within a certain time period.

  4. Term life insurance costs much less than permanent cash value life insurance. The price difference is so substantial that many financial experts argue that term life is the preferred investment vehicle.

The cost of term life insurance increases considerably as you age. It is also more difficult to secure term life insurance at age 80 and older.

Cash Value Life Insurance vs Investing

Opting for a term life insurance policy can save you a lot of money in premiums. Investing those savings can put you ahead of the game, according to experts.

Consider this example:

Tony buys a $1 million, 30-year term life insurance policy at age 32. His annual premium amount is $984.00.

Jeff is also 32 years old and also buys $1 million in life insurance coverage. But, he decides to buy a cash value life insurance policy. His annual premium is $10,023.60.

That's a difference of $9,039.60 annually that Tony could save and invest on his own. Over the 30-year term, that's about $270,000.

The stock market has an average rate of return of 7%. Using the money you'd save in premiums, your investment could yield $910,000.

Of course, Jeff has guaranteed financial security for him and his family. The cash value is also accessible to him to pay for any big expenses or to use for retirement. Tony must find an alternative investment means to financially secure his family's future.

Evaluate how much you could earn by investing the difference in premium costs on your own. Compare that estimate with your guaranteed cash value for the permanent life insurance policy and determine which option is best for your situation.

Which Cash Value Life Insurance Policy Is Right for Me?

In general, finding the best cash value life insurance plan for you depends on you:

  • Life and financial situation
  • Investment interest and astuteness
  • Current retirement plans

The four main types of cash value life insurance—whole life, variable life, universal life, and variable universal life—are designed to meet specific lifestyle needs. Keep reading to learn more.

Whole Life Insurance
A whole life policy is best for people who prefer consistency and reliability. They get this through whole life's guaranteed death benefit, fixed premiums, and guaranteed cash value.

Variable Life Insurance
This policy appeals to those who want to control the risk of investing without giving up flexibility. Variable life provides investment strategies that range from conservative to aggressive. The flexible death benefit and premium payments can be adjusted to match investment goals.

Universal Life Insurance
A universal life policy is a good match for those who want to build tax-free savings without much risk. They also do not plan on using the earnings any time soon. Universal life grows cash value over time, building an inheritance for the loved ones you leave behind.

Variable Universal Life Insurance
Variable universal life policies are best suited for people who want great flexibility. They want to be fully involved in monitoring the performance of their investment portfolio and changing the allocation of their policy's cash value accordingly.

Other Considerations
Here are other factors to weigh when choosing a permanent life insurance plan:

  • Your family's expenses

  • Estate planning if you have an estate

  • College expenses

  • Adult special needs family members or older family members who rely on your income

The goal of cash value life insurance is to meet your life's needs. That could mean:

  • Giving you a guaranteed way to save for your future

  • Ensuring financial security for your family if you die unexpectedly

  • Paying off your debts so most of your assets go to your beneficiaries

  • Saving for major expenses in the future

  • Building a retirement nest egg

  • Adding another savings vehicle if you maxed out other investment accounts

  • Protecting your estate.

Whatever the case may be, the life insurance plan you select should match those needs.

A financial adviser or life insurance agent can help you decide which life insurance plan is best for you.

These professionals will conduct a financial needs analysis to determine your needs and budget. Then they will review all available options with you to be certain you are investing in the right vehicle for your life situation.

How to Buy Cash Value Life Insurance

You can request quotes and comparison shop online for the best rate and plan. Most online insurance marketplaces also allow you to start the application process online after accepting a price quote.

You can also use a life insurance agent to purchase insurance. Read on to learn more.

Working With a Life Insurance Agent
If you prefer a more personal buying process, you can purchase permanent life insurance through an insurance agent or other financial broker in your local community.

Keep in mind that there are two types of life insurance agents: captive and independent.

Captive Agent
Works for a specific life insurance company and only sells that insurer's life insurance plans.

Independent Agent
Certified to sell life insurance plans from numerous life insurance companies.

A life insurance consultation with either type of life insurance agent is free.

Other Options
Some other ways to buy permanent cash value life insurance is through a membership group, such as a travel association or interest group in which you belong.

You also may be able to buy life insurance through your employer. Before doing so, inquire about the type of plan. Many businesses offer either term life insurance or accidental death and dismemberment insurance.

If you buy permanent life insurance through your employer, check to see if you have to surrender or terminate the policy if you are no longer working for the company.

Evaluating Your Choices
Before buying cash value life insurance directly on the internet or through an agent, be sure to:

Check the insurance company's rating.

  • Ratings are assigned by independent rating companies, such as A.M. Best and Standard & Poor's. The ratings reflect the life insurer's financial strength. Look for a company with ratings in the "A" range, which indicate it is a financially sound life insurance company.

  • Review customer comments or complaints. A good resource to see how a life insurance company handles service-related issues is the Better Business Bureau.

Check the credentials of the agent.

  • Make sure the agent specializes in cash value life insurance.

  • Check to see if the agent has professional life insurance or financial planning designations, such as CLU, LUTCF, ChFC, CFP, or FSS. These designations signify the agent has successfully completed advanced training in life insurance.

The Application Process

If everything checks out, the next step is applying for a life insurance policy. Expect the process to take about four to six weeks. During that time, the following takes place:

  • You complete a comprehensive application that covers your:
    • Current health status
    • Medical history
    • Family history
    • Occupation and hobbies
    • Driving record

  • You take a medical exam arranged by the life insurance company. This exam is free and usually includes a blood test and urine sample.

    Your application and medical exam results are reviewed by the life insurer's underwriting department. It rates your policy based on how risky it will be for the company to insure you. This is how the cost of your policy is determined.

  • You receive the actual price of your life insurance plan and payment plan options.

  • You decide whether to accept or decline the price. If you accept the policy, you submit your first payment.

  • You receive your life insurance policy.

If you don't want to take the medical exam or have serious medical conditions that could lead to your application being denied, consider no-medical exam life insurance. No-questions-asked life insurance costs a bit more, but the time saved might be worth it.

After You Receive the Policy
Be sure to store your cash value life insurance policy in a safe place. And remember to update it as things change in life. This is especially important if you change your address or your beneficiary dies before you.

It's also a good idea to let your beneficiary know about the policy. This makes it easier to claim the death benefit when you're gone.

Bottom Line

Cash value life insurance combines life insurance with a means of saving for your future. It's permanent insurance, so it doesn't expire after a certain period of time.

The savings component gives you control over how your money is invested. You can choose a policy with no risk, little risk, or moderate risk. You also have flexibility with the policy's death benefit and premium amounts.

Cash value life insurance is a good option for those looking for lifelong financial security for their loved ones. Affordability could be an issue since its premiums are high. However, in time, the cash value the policy builds can offset the cost.

Because of the complexity of cash value life insurance, it might be helpful to consult with a financial adviser or life insurance agent to determine if this is a good investment for you.

Write to Maryellen Cicione at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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