What Is Cash Value Life Insurance? How Does Life Insurance That Builds Cash Value Work? (Calculator)

Shawn Plummer

CEO, The Annuity Expert

Life insurance policies can be an essential part of a financial plan. The purpose is to provide your loved ones with protection in the event of your death so that they are not left without the support you provided throughout their lives. But do you understand all of the nuances surrounding life insurance? One concept to explore is cash value in life insurance or “accumulation value.” It’s an element that might make purchasing a policy even more attractive and help you save money overall. This guide will dive into what cash value means and how it works, helping you make more informed decisions when investing in life policies.

What Is A Cash Value Life Insurance Policy?

Permanent life insurance is an attractive option for many, as it includes a cash value component that has the potential to increase over time at either fixed or variable interest rates. Those equipped with such policies may opt to borrow on their policy’s cash value through loans secured by their insurance. When the policyholder passes away, their beneficiaries receive the death benefit and, in some cases, any accumulated cash value.

Permanent life insurance policies, such as universal life insurance, tend to have higher premiums than term life insurance because they are designed to last a lifetime. Premiums can be paid either in one lump sum or through an ongoing payment plan, depending on what works best for the policyholder.

It is essential to know that some permanent life insurance policies may have limitations, such as a maximum coverage amount, age restrictions, etc. Additionally, these policies’ cash value component may be subject to taxation depending on certain conditions. For these reasons, it’s essential to consider all aspects of your policy before committing to a long-term option.

    Which Life Insurance Policy Does Not Have Cash Value?

    Term life insurance is one of the most popular types of life insurance policies, and for a good reason. It is typically more affordable than other types of policies and offers coverage for a period of time, which can be ideal for young families or people with debt.

    However, one downside of term life insurance is that it does not have cash value. Therefore, if you cancel your policy before the end of the term, you will not receive any money back. In contrast, whole life insurance policies have cash value, which can be accessed if you cancel your policy early.

    What Is Cash Value Life Insurance Designed For?

    Cash value insurance is a way to build money over time in your policyYouou can take out the money you’ve built up as a loan or withdrawal. You can also use it to pay your policy premium payments later.

    Components Of A Cash Value Life Insurance Policy

    Cash value life insurance is only available in a permanent life insurance policy. Permanent life insurance policies offer two components:

    • Death Benefit: “Face Value” is the amount paid to beneficiaries when the insured person passes away. This is the life insurance payout.
    • Cash Value: an additional feature that might make your policy more valuable because you may be able to access the money while you’re still alive.

    Does Term Life Insurance Build Cash Value?

    No, term life insurance does not build cash value. Term life insurance is designed to provide temporary coverage for a specific period and does not offer any savings or investment components.

    Term life insurance aims to protect against the financial burden of the insured individual’s death during the policy’s active period. Term life insurance pays out a death benefit if the insured individual passes away during the policy’s active period and no cash value accumulates over time. Any premium payments made are lost if the policyholder outlives their term life policy.

    How Do Permanent Life Policies Build Cash Value?

    As you continue making premiums on your policy, the cash value of it begins to accumulate over two to five years. Your life insurance company usually invests this money in a safe and secure investment with a modest yield rate, allowing for steady growth of your funds as time progresses. If you ever need to withdraw money from your policy, the cash value can be used as a source of funds.

    Additionally, if you decide to stop making payments on your cash value insurance policy, you may be able to cover the expenses associated with keeping your coverage active. Even if you cannot make payments, your coverage will remain intact, and you can continue to benefit from its advantages.

    In some cases, life insurance companies may allow for loans to be taken against the cash value of a policy. This is typically an option for policyholders who need short-term financial assistance and want to use their money towards other investments or expenses. The loan amount is based on your policy’s monetary value, and the interest rate is usually low due to the liquidity of the asset.

    What Is Cash Value Life Insurance? How Does Life Insurance That Builds Cash Value Work? (Calculator) (2023)

    How Does Cash Value Life Insurance Work?

    A cash value policy’s premiums are usually set at a fixed rate or grow based on an external stock market index such as the S&P 500. A portion of your premium payment creates the policy’s death benefit. Another part is used to maintain the cash value of your insurance.

    Usually, the cash value of a life insurance policy starts to grow after two or five years. Once it grows, you can generally access it according to the policy’s guidelines.

    Your policy’s cash value is only available to you while you are e alive. The death benefit will be paid to your beneficiaries if you die. If any cash value remains, it will return to the life insurance company.

    Who Can Use The Cash Value In A Life Insurance Policy?

    The policyholder can use the cash value of life policies for various purposes. Generally, life insurance companies allow access to the cash value through policy loans or withdrawals. Policy loans are taken out against the cash value in your policy and may not require repayment. However, withdrawals are taken directly from your cash value balance, reducing your death benefit and, depending on the type of policy, may incur taxes and any surrender charges.

    Typically, only the policyholder can access the cash value of a life policy. However, there are exceptions to this rule; an authorized third party, such as a bank or financial institution, may be granted access to your policy’s cash value if you agree. Additionally, suppose you are the owner of a universal policy and have included a secondary beneficiary. In that case, they may be able to access the cash value in your policy should you pass away.

    How Long Does It Take To Build Cash Value On A Whole Life Insurance Policy?

    The amount of cash value in your policy will depend on the type of policy and the rate of return on your investments. Depending on the performance of your investments, you might find that the money you have accumulated can be used for various needs, including financing college tuition or retirement savings.

    In addition to enjoying all these benefits, permanent life insurance also provides a death benefit to your beneficiaries. This means that in the event of your passing, your policy will pay out an agreed-upon amount to help ensure your loved ones are provided for.

    Is Cash Value Life Insurance A Good Way To Invest?

    Financial advisors suggest that cash-value life insurance should only be considered an investment option after you have fully committed to a retirement account such as IRA and 401(k)s, saved for your emergency fund and essential needs, and are willing to invest in the policy long term. Cash-value life insurance can provide tax advantages and a flexible source of funds for retirement. It can also offer living benefits, providing you with access to money for unexpected medical expenses or other financial needs.

    However, some drawbacks should be considered before investing in cash-value life insurance. For example, premiums can be expensive if your health is poor, and the money you put into the policy is not guaranteed.

    Additionally, life insurance policies are illiquid investments, meaning you cannot quickly access your policy’s monetary value if you need it for an emergency. To receive the full benefits of a cash-value policy, you must commit to paying premiums until the maturity date or until the policy is surrendered.

    Cash-value life insurance can be a good investment option for those looking for additional retirement income and living benefits. Still, it should not be considered until you fully evaluate your other options. In addition, before making any decisions, it is essential to understand the risks involved.

    What Is Cash Value Life Insurance? How Does Life Insurance That Builds Cash Value Work? (Calculator) (2023)

    Do You Have To Pay Back Cash Value Withdrawals?

    If you choose to access the cash from your permanent life policy, it is likely free of any income taxes as long as the amount doesn’t exceed what was initially paid. Although, there are drawbacks: Your death benefit could be significantly lowered depending on how much money has been withdrawn and according to the terms of your specific policy. In addition, your policy may include fees or charges for withdrawing funds.

    Finally, the decision to access cash from your permanent life policy should not be taken lightly. It is essential to discuss any potential drawbacks or tax implications with a financial professional before you make a final decision. Accessing cash from your permanent life insurance policy is an important decision that should be made carefully and with consideration given to all potential consequences. As always, you should talk to your insurance agent or a financial advisor before deciding how to use your permanent life insurance policy.

    What Is Cash Value Life Insurance? How Does Life Insurance That Builds Cash Value Work? (Calculator) (2023)

    What Happens To Cash Value In Whole Life Policies Upon The Policyholder’s Death?

    Upon the policyholder’s passing, it is vital to remember that the cash value is part of the death benefit and not available to the policyholder or their estate. Life insurance is a great way to protect your family’s financial future, and permanent life insurance can provide additional coverage for years after you’ve passed away.

    How Can I Withdraw Cash Value From Life Insurance?

    Since you can only use the cash value of your life insurance policy while living, it is essential to use it. Here are four ways you may be able to access its cash values:

    • Make a withdrawal from the accumulated cash value
    • Take out a loan
    • Surrender the policy
    • Use the cash value to help pay premiums

    Withdrawing Money from your Cash Value Policy

    With universal life insurance, you may be able to take some of the cash value out as a partial withdrawal. However, with whole life insurance, the only way to access the cash value without canceling the policy is by taking out a loan from the insurance company.

    Taking Out a Loan on Your Policy

    Cash-value life insurance policies can let you borrow money to pay a home mortgage early, cover a child’s college tuition, or go on vacation. However, if you don’t pay the loan and all interest back before you die, your death benefit will be reduced by the amount of the loan and any fees. In addition, loan money is not considered taxable income.

    Surrendering Your Life Insurance Policy for its Cash Surrender Value

    A “surrender” is when you cancel your policy, and in return, you receive the life insurance cash surrender value. When this happens, you no longer have life insurance coverage. Your “equity” will be the amount of money you paid into the account, and interest that has added up over time will be your “equity.”

    Fees When Surrendering Your Life Insurance Policy

    • Any outstanding loan balance or unpaid premiums on the policy
    • Additional surrender fee
    • Income tax on the money you receive.

    Increase The Death Benefit or Pay The Premiums

    You can use your cash value balance to help pay your premiums or ask to increase your death benefit.

    A cash value policy will give you multiple options for what to do with the money you save over time. You can use it for yourself during your lifetime or leave it to your heirs after you die. This policy also provides a significant death benefit for your loved ones.

    If you need affordable help with planning your will, trust, or estate, we recommend:

    What Is The Cash Value Of Life Insurance?

    Which Type Of Life Insurance Policy Generates Immediate Cash Value?

    Whole life insurance is the type of life insurance that generates immediate cash value. Universal life, indexed universal life, and variable universal life insurance policies generate cash value, but whole life insurance generally has the most flexible options and features for cash value accumulation. From a policy standpoint, whole life insurance is the simplest form of permanent life insurance. Whole life insurance has level premiums and guaranteed death benefits as long as the policy remains in force.

    Cash Value Life Insurance Calculator

    Use our free calculator to estimate your permanent insurance needs.

    What Are The Advantages Of Cash Value Life Insurance?

    Cash value life insurance provides several advantages over term life. The main advantage is that it offers the policyholder death benefit protection and the potential to accumulate a cash value account. This cash value can supplement retirement income, cover medical expenses, or other financial needs. In addition, the longer the policy is held, the more time there is for the cash value to increase.

    In addition, policyholders may also be able to access the cash value through loans or withdrawals against their policy. These funds can be used for various purposes, such as funding education or paying off debt.

    Another advantage of cash-value life insurance is that it often has more flexible premiums than term life. As a result, policyholders may be able to adjust their premium payments over time based on their financial situation and goals. This can help them manage their life insurance costs more effectively.

    Finally, cash value life insurance offers policyholders certain tax benefits that term life does not provide. For example, premiums paid for permanent life insurance may be eligible for a tax deduction in some cases.

    Cash value life insurance provides many advantages over term life insurance that can benefit policyholders both now and in the long run. For example, it can provide death benefit protection, flexible premiums, and the potential to accumulate cash value and access those funds in the future.

    What Are The Disadvantages Of Cash Value Life Insurance?

    Some of the main disadvantages of cash-value life insurance include the following:

    • Expensive: Cash value life insurance is usually more expensive than term life insurance because it combines death benefit protection with an investment component. The cost of a cash value policy depends on the interest rate in the policy, age, and health of the insured, as well as other factors.
    • Withdrawal Penalties: If you withdraw money from your policy before age 59 1/2, you may have to pay high withdrawal penalties and taxes.
    • Lower Interest Rate: Cash value life insurance policies usually offer lower interest rates than other investments such as stocks or mutual funds. This can limit your potential growth in wealth.
    • Investment Risk: While cash value policies are considered safe investments, some risk is still involved. Your policy’s performance may not match the interests of other investments you make, and you could end up with a lower return than expected.
    • Limited Investment Opportunities: Cash value life insurance customers are limited in the types of investments they can make. Most policies only offer a few options, such as stocks, bonds, and mutual funds. This can limit the potential for higher returns on your policy’s cash value.

    Next Steps

    Cash-value life insurance policies may be the right option if you want a permanent life insurance policy with a savings component. These policies can grow a lot of money over time, and if you are healthy and under the age of 35 when you buy one, you will have access to that money should you need it. Request a quote below to learn more about cash-value life insurance policies. Then, contact us if you need help purchasing life insurance.

    What Is Cash Value Life Insurance, And How Does The Policy Work? (Calculator)

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    Frequently Asked Questions

    What types of life insurance build cash value?

    Cash value is a standard variable, whole, and universal life insurance feature. Term life insurance does not have cash value.

    Who offers the best life insurance with cash value?

    Protective whole life insurance and North American Indexed Universal Life Insurance offer the best life insurance with cash value due to growth ability and the company’s A+ (Superior) rating with A.M. Best.

    What is the cash value of a $10000 life insurance policy?

    The cash value of a $10,000 life insurance policy depends on the type of policy and the insurer. Whole-life policies generally have a higher cash value than term-life policies, and older policies tend to have a higher cash value than newer policies. The cash value of a life insurance policy is usually equal to the death benefit minus any outstanding loans or other debts against the policy. Some insurers charge a surrender fee if the policy is cashed in early. To get an accurate estimate of the cash value of a life insurance policy, it is best to contact the insurer directly.

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    Shawn Plummer

    CEO, The Annuity Expert

    I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

    The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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