What Is Cash Value Life Insurance and Is It Worth It? (2024)

When it comes to life insurance, knowing you will always be covered can offer you extra peace of mind. Cash value policies aim to deliver that reassurance.

Assuming you stay current with the premiums, cash value policies remain in effect as long as you live, allowing your heirs to collect the benefit no matter what. Policies also have a savings or investment feature that you can tap in to while you’re still living.

Given those advantages, it may come as no surprise that cash value policies are popular. In 2022, they represented about 80% of the life insurance market, according to trade group Limra.

Still, financial planners say you should think carefully before choosing a cash value policy. The main alternative, term life policies—which are in place for a specific term, such as 10 or 20 years—have some big advantages of their own. Term policies tend to be far cheaper than permanent ones, and for that key reason many financial planners say they represent a better value for most consumers.

Before purchasing a policy, here’s what you need to know about cash value life insurance.

What is cash value life insurance?

Although you’ll see insurance companies advertise various life insurance products, all policies can be divided into two categories: term and cash value.

Term life insurance, also known as temporary insurance, is for individuals that want simple, inexpensive coverage. Term policies pay out a death benefit, or a lump sum of cash, to the beneficiaries if the covered person dies during the policy term; after that, there is no payout. And if the covered person survives the term policy, the premiums are not refunded.

Cash value policies are quite different. They provide permanent life insurance coverage that lasts for as long as you pay your premiums. For that reason, they’re often referred to as permanent policies. Cash value policies also include a savings element, which you can tap while you are still alive.

How your policy’s cash value works

Cash value life insurance is so named because of its ability to build cash value. When you pay your premiums, a portion of the money is set aside and functions like a tax-deferred savings account. If you build enough cash value, you can access it in the following ways:

• Take out a loan from the cash value
• Put it toward your policy’s premiums
• Withdraw cash

The idea of accumulating a cash balance that you can use later may be appealing. It means you can still enjoy some of the money you spend on your life insurance policy while you are still alive. And tapping your cash value won’t decrease your death benefit either—it’s essentially a separate savings vehicle bolted on the side of your life insurance plan.

There is a big downside, however. In order to fund both a death benefit and a saving account you can enjoy later in life, the premiums you pay need to be large, and the interest rate you are offered on the savings account is often far below what you could earn if you simply took out a cheaper term life insurance policy and invested the leftover money in stocks and bonds. The upshot: The value of your cash balance will take years to grow, and is likely to remain just a small fraction of what you could earn simply investing on your own.

Types of cash value coverage

There are two main types of cash value insurance:

Whole life

Whole life insurance is the most popular form of cash value insurance. With a whole life policy, the cash value grows at a fixed rate of interest.

Universal life

Universal life policies are more flexible than whole life policies. You can adjust the premiums or death benefit as your family’s financial needs change and the cash value can be invested in the stock market. However, depending on the performance of your investments, the cash value can decline.

Benefits and drawbacks to consider

Cash value insurance can be significantly more expensive than term life coverage. According to PolicyGenius, an insurance marketplace that allows customers to get insurance quotes from multiple companies, whole life policies—the most commonly used form of cash value coverage—is about 10 times the cost of term coverage.

However, cash value insurance can be appealing because it can last for your lifetime. And instead of losing all of your premiums, you can get a portion of what you paid back through the policy’s cash value.

But according to Jay Zigmont, a certified financial planner based in Water Valley, Miss., and the founder of Childfree Money, that perk can be misleading, as people think they’re growing their money.

“You see a lot of people talking about how these policies allow you to be your own bank, but what they’re actually doing is giving you some of your money back from the premiums you paid after they take out their fees and commissions,” Zigmont said.

With term life coverage, you can often buy a policy directly from an insurance company. But with cash value policies, you usually have to work through an agent that earns a commission on policies they sell, so they have a financial incentive to sell certain products. Although cash value policies can earn interest or returns through investing, the fees can eat into your returns, and you may be better off investing on your own.

“The fees can be all over the place,” Zigmont warned. “Some are 5% or 10% upfront, and some are 2% over the life of the contract. It depends on how it’s structured, and insurance companies can actually adjust the products to increase or decrease their commissions.”

How to get cash value life insurance

Although some employers offer permanent life insurance as part of their benefits packages, you can purchase an individual policy on your own. Depending on the amount of coverage you want, you can get cash value insurance online or through an agent or advisor.

Online

Some companies sell smaller permanent life insurance policies—such as policies with death benefits of $50,000 or less—directly to consumers through their websites. Some of them are simplified or guaranteed issue, so you don’t have to undergo a medical exam, and policies go into effect as soon as you pay the first premium.

Agent or financial advisor

If you want to buy a policy with a larger death benefit, you’ll usually have to work with an insurance agent or financial advisor that sells life insurance. You can work with an independent insurance agent near you or you can use an insurer’s network of agents to purchase a policy.

The agent or advisor will meet with you in person or over the phone to discuss your needs and finances and will make recommendations about specific policies. If you decide to proceed, they will work with you to set up a time for a medical exam and to fill out the other required paperwork.

After the medical exam, the agent or advisor will share the policy premiums and other details with you. You usually have a few days to review and sign the materials, so take the time to read them carefully. Particular issues to look for include:

• Does the cash value earn interest or is it invested?
• Are there caps on how much you can earn in interest?
• What is the timetable for cash value accumulation?
• What are the surrender fees if you decide to stop paying the premiums?
• Are the fees and commissions fixed, or can they fluctuate over time?

Keep in mind that agents and financial advisors are compensated only if you buy certain types of coverage. According to the American Council of Life Insurers, life insurance companies paid $51 billion in commissions to agents in 2021, the last available data, so it’s important to know what kind of insurance you want before meeting with an agent. And if the agent makes a recommendation you’re unsure about, it’s wise to ask what commissions they earn if you buy that product.

Who should have cash value coverage?

Permanent or cash value life insurance is a more complex and expensive form of coverage, so it’s not suitable for everyone. Generally, financial planners say that cash value policies are best for the following groups:

• Those who have an existing permanent policy may consider switching to term life coverage to save money. But if you have existing health issues, you may not qualify for coverage (and may be denied coverage entirely). Keeping your permanent policy may be the only way to maintain life insurance coverage.
• High net-worth individuals who are looking to take advantage of tax-deferred cash value growth and tax-free death benefits for their loved ones.
• Those who have trouble saving on their own

Andrew Latham, a financial planner and director of content at SuperMoney in Santa Ana, Calif., said the cash value insurance may be useful for high net-worth individuals, but it doesn’t make sense for most families.

“If you’re terrible at saving or if there’s no way you’ll put [the amount of your premiums] in an investment account on your own, maybe it’s worth it,” says Latham. “But otherwise, term life insurance and investing the difference is the smarter option for most people.”

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