cash value insurance
Cash value life insurance policies can provide lifelong coverage alongside an investment account. Cash value policies have a portion of your premiums which are typically paid into a separate account for you or the investment account, which in turn creates the cash value, and this money grows with interest over time. If you want to cash in your life insurance early and surrender your coverage to the insurer, you will receive the policy’s cash value minus fees. However, you can also gain access to your cash value as a policy loan, use the cash value to pay premiums or make a partial withdrawal.
Cash value life insurance refers to any cash value insurance policies that not only have a death benefit but also accumulate value in a separate account within the policy. Each time you make a premium payment, the money is split among three different categories:
Cost of insurance, the amount required to fund the policy’s death benefit
Fees and overhead: the insurance company's operating costs and fees
Cash value: your account within the policy, which accumulates value
A life insurance policy’s cash value is separate from the death benefit, so your beneficiaries would not receive the cash value if you passed away. Cash value that’s left in your life insurance policy when you die is kept by the insurer. A life insurance policy’s cash value is essentially the amount of money you would receive if you decided to give up the policy to the insurer, or surrender your coverage. The cash value behaves like an investment as it grows tax-deferred with interest, as determined by the type of policy, and can be used as collateral for a loan.
Even though the cash value’s growth is tax-deferred, it will still take several years of compound interest to grow meaningfully. Plus, for the first several years of coverage the majority of your premiums are eaten up by the cost of insurance and fees, so cash value accumulation is slow.
That's why we generally don’t recommend a cash value life insurance policy if you’re fairly advanced in years. The older you are, the more likely that the cost of your premiums will outweigh any eventual benefit you see. If you need a permanent life insurance policy to cover estate taxes or leave an inheritance, guaranteed universal life insurance provides lifelong coverage with little to no cash value component.
If you would like to learn more about using cash value insurance in a business or for retirement purposes it is important to reach out to us and schedule a free 15 minute initial consultation below to learn more about the many ways a policy can help towards retirement, business planning or one of many other purposes these policies serve to help.
Policy types vary to do different things based on different factors for you and the need of the policy holder but here are a few ways cash value policies grow.
Whole Life Insurance
Cash value builds at a fixed rate determined by the insurer. It’s designed to reach the size of the death benefit when the policy matures (typically, when you turn 100).
Universal Life Insurance
Based upon market interest rates and the performance of the insurer.
Indexed Universal Life Insurance
Based upon performance of an index, such as the S&P 500.
Variable Life Insurance
Cash value can be invested in certain aggregated portfolios offered by the insurer which are similar to mutual funds.