What Is Cash Value Life Insurance?

Video Transcript

Today we're talking about life insurance with cash value, a type of policy that not only helps provide protection but also builds value over time.

Life insurance with cash value is often viewed as a two-in-one deal. It is a type of permanent life insurance with both a death benefit and a cash value component. This cash value is a portion of your premium payments that the insurance company invests and grows tax-deferred over the years. But remember, the primary purpose of any life insurance is to provide a death benefit to your beneficiaries.

When you pay your premium a portion covers the insurance cost and anything paid additionally would go into the account value and is credited interest. Over time, this account grows either at a fixed interest rate or a rate based on more complex investments, depending on the type of policy you have. This growth is tax-deferred, which means you don't pay taxes on the gains while they're accumulating.

Here are 2 examples of life insurance with cash value. Whole Life Insurance: Offers coverage for a lifetime as long as premiums are paid and can build cash value over time. Universal Life Insurance provides more flexibility with premiums and death benefits. The cash value growth depends on the insurer's performance but has a minimum guaranteed rate.

Let's talk benefits. Financial Flexibility allows you to borrow against the cash value or even make withdrawals for emergencies, supplement your other income, or fund major expenses. Tax Advantages cash value which typically grows tax-deferred and, if managed correctly, loans and withdrawals can be tax-free.

But these factors too. These policies are generally more expensive than term life insurance. And managing cash value involves making informed choices about premiums and potential withdrawals.

Deciding if life insurance with cash value is right for you depends on your financial goals, need for flexibility, and your willingness to have a more involved financial product. Thanks for tuning in to learn about life insurance with cash value. It's a tool that can help secure your loved ones while helping to provide the financial security that comes with life insurance.

Life insurance can help keep loved ones safe from financial worry. Some types of life insurance include extra benefits such as having a cash value. If you're considering a cash value life insurance policy or just wondering how it works, this guide answers some of the most common questions.

Cash Value Life Insurance Defined

Some types of permanent life insurance policies, such as whole life or universal life, have a cash value feature in addition to the death benefit. Part of your premium goes toward the cash value portion and has the potential to grow. Life insurance with cash value provides a living benefit to policyholders by allowing them to borrow or withdraw from their policy.¹

How Does Cash Value Life Insurance Work?

Life insurance provides a payout to help cover expenses for your loved ones after you pass away. This may include funeral costs, outstanding debts, and ongoing living expenses.

When you purchase a permanent life insurance policy, part of your premium potentially builds cash value over time. The insurance company invests these premiums, which allows the cash value to potentially grow. How the cash value grows depends on the type of policy you choose.

Accessing Cash Value

The policy owner can access cash value in the following ways:

• Policy loans: You can borrow against the cash value. Interest is charged, and any unpaid loan balance reduces the death benefit until it is repaid.
• Withdrawals: Taking a withdrawal reduces the cash value and lowers the death benefit.

With some policies, accumulated cash value can also be used to help pay premiums. If you take a loan, that cash value is no longer available for premium payments. Before accessing cash value, confirm you can continue paying premiums to avoid a policy lapse.

Impact on the Death Benefit

Withdrawing or borrowing from cash value reduces the amount paid to beneficiaries. There is a trade-off between using cash value during the insured’s lifetime and preserving the full death benefit for beneficiaries.

Types of Life Insurance Policies With Cash Value

Only permanent life insurance policies build potential cash value. These policies can last your entire life as long as you keep up with the premiums. There are several types of permanent life insurance policies with a cash value component:

Whole Life Insurance Policy

Whole life insurance charges a set premium that doesn't change. For cash value, the company provides guaranteed values that slowly grow over time. It's a steady way to build cash over time.

Universal Life Insurance Policy

With universal life insurance, you have some flexibility to adjust your premiums and/or death benefit to meet your changing needs. However, increases in coverage are subject to underwriting. There also must be enough cash value in the policy to cover monthly charges if a lower premium is paid than the amount selected at issue or if a premium payment is skipped. 

Additional premium payments may be needed to maintain a policy during lower interest rates. With universal life insurance, cash value accumulation fluctuates according to market interest rates, so the amount you earn per year can go up and down.

Does Term Life Insurance Have Cash Value?

Term life insurance does not have a cash value component because it is temporary coverage.

If you die during this period, the policy pays your beneficiaries the death benefit. If you outlive the term, your coverage expires. With term life, you typically pay less per month but do not accumulate cash value in exchange.

What Are the Benefits of Cash Value Life Insurance?

Life insurance helps provide protection for your loved ones if an unexpected death occurs. Cash value life insurance goes a step further by offering features beyond the death benefit, including savings and long-term value growth.

Here are some of the benefits of cash value life insurance:

• May Grow Over Time: Each time you pay your premium, you might increase your cash value. Your cash value also has the potential to grow over time.
• Can Provide Loans for Temporary Needs: If you only need money for a short amount of time, such as to pay for a car repair or vacation, cash value gives you the option to request a loan and then pay the money back.¹
• Offers Potential Tax Advantages: Cash value typically grows tax-deferred. You may be able to defer taxes on cash value accumulation in your policy because gains are not taxed until money is received.

Options for Using Cash Value

There are several ways you could use the cash value in a life insurance policy.

Paying Policy Premiums

Some policies allow you to use cash value to help cover your life insurance premium. If cash value is available, this may provide a temporary break from out-of-pocket payments. A financial representative can explain whether this option applies to your policy.

Withdrawing Money as Needed

Depending on the policy, you may be able to take withdrawals. These funds could supplement other income or be used for a major purchase, such as a vacation.¹

Turning It Into Guaranteed Future Income

If generating retirement income is a priority, cash value may be used to purchase an annuity. An annuity is a contract with an insurance company that allows you to contribute money on a tax-deferred basis and receive regular income payments in return.

Keep It for the Future

If you do not need the money now, you can leave the cash value untouched. It will continue to have the potential to grow and remain available if needed later. Avoiding loans or withdrawals may also result in a larger death benefit.

   Learn how to maximize your cash value for future financial security. Request a Free Life Insurance Quote  

Is the Cash Value of Life Insurance Taxable?

Life insurance cash value is usually not taxable while it grows inside the policy. The IRS considers the growth taxable income, but taxes are deferred as long as you do not withdraw the money.²

When you take a withdrawal, taxes depend on the amount. You can withdraw up to the total premiums you paid without owing income tax. Only withdrawals above that amount are taxable. For example, if you paid $50,000 in premiums and your cash value is $70,000, you can withdraw $50,000 tax free. Any amount above that would be taxable.

However, loans taken against the cash value are generally not taxable if the policy remains active. If the policy ends with an outstanding loan, the IRS may treat the loan as a withdrawal and tax any gains.

On the other hand, if the policy stays in force until death, the death benefit is used to repay any loan balance. Beneficiaries receive the remaining amount, though loan interest can reduce the final payout.

What Happens to the Cash Value of a Policy at Death?

When you die, your beneficiaries will receive the death benefit payment. The cash value balance is not added to or directly included in the death benefit, with few exceptions. The policy terminates, along with its cash value, upon payment of the death benefit. Taking out some of your cash value while alive, either through a loan or a withdrawal, may reduce the future death benefit.

Conclusion

Cash value life insurance can offer both lifelong coverage and added flexibility, but the trade-offs between accessing cash value and preserving the death benefit are worth careful consideration. As you weigh this information, meeting with a financial representative or tax professional could be helpful. They can answer your questions and help you decide how cash value life insurance may work for you.

   Enhance your insurance coverage with cash value. Request a Free Life Insurance Quote  

Footnotes & Sources

1. Loans will accrue interest, and loans and withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty) and loans (e.g., interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse. A customer should always determine whether a withdrawal or a loan is preferable for their individual situation.
2. Life insurance & disability insurance proceeds. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds.