Life insurance is a critical piece of any well-rounded financial plan, right up there with saving for retirement and combining finances with a partner. But with so many different types of life insurance and policy options available, it can feel impossible to know where to start.
This guide will help you understand what cash value life insurance is, explain the different types of policies available, outline the pros and cons of having cash value life insurance, and provide tips for choosing the right policy for you.
Additionally, we'll discuss premium payments and how they contribute to building your policy's investment account, and you'll learn about customizing your policy to meet specific financial needs through strategic investments or using accumulated funds to pay future premiums.
Lastly, understanding cash value life insurance can be challenging, so it’s crucial to seek professional advice to make informed decisions. We will discuss the importance of seeking unbiased advice when searching for a trusted professional.
Cash Value Life Insurance Overview
What Is Cash Value Life Insurance?
Cash value life insurance is a type of permanent life insurance policy that provides lifelong coverage and has an investment component.
This unique investment component allows the policyholder to build cash value over time, which can be accessed during their lifetime or left as part of the death benefit for beneficiaries. In addition, as you accumulate funds over time, you can use them for various financial needs or even to enhance your retirement income.
Lifelong Coverage With An Investment Component
Unlike term life insurance, which only offers coverage for a specified period, cash value life insurance offers protection throughout your entire lifetime. The added investment component enables the growth of funds within the policy, making it more than just a death benefit payout to beneficiaries upon the insured's passing.
But that added coverage comes with a cost.
Generally, cash value life insurance policies require higher premium payments than term policies, making them cost-prohibitive for many. On average, you can expect to pay about five to 20 times more for permanent life insurance premiums than for term life insurance premiums. In addition, many individuals and families find they don’t need lifelong insurance coverage—they just need coverage while they have dependents relying on their income, making that added cost an unnecessary expense.
For more information on the differences between term and permanent life insurance, check out Monarch Money’s blog.
Types of Cash Value Life Insurance Policies
Beneath the surface of cash value life insurance lies a variety of types, each providing different features that can suit individual requirements and preferences. Understanding these differences can help you choose a policy that’s right for you.
Here are four common types of cash value life insurance:
1. Whole Life Insurance
Whole life insurance is a popular option that provides lifelong coverage with guaranteed death benefit protection and cash value accumulation at a fixed rate. In addition, premium payments typically remain level throughout the policy's duration, making it easier for individuals to budget accordingly.
2. Universal Life Insurance
Universal life insurance can offer more flexibility than whole life policies by allowing adjustments to premium payments and death benefits as financial circumstances change over time. This type of policy also features an investment component where funds can be allocated into different accounts based on risk tolerance levels.
3. Variable Universal Life Insurance
Variable Universal Life Insurance combines the features of Universal Life Insurance with the option to invest in market-based products such as stocks, bonds, and mutual funds. Policyholders have more control over the amount invested and how those investments are allocated for maximum potential return. The cash value of a Variable Universal Life Insurance policy varies depending on the performance of its underlying investments, allowing policyholders to realize higher returns but also face greater risk than with other types of cash value life insurance policies.
4. Indexed Universal Life Insurance
Indexed Universal Life Insurance is a type of permanent life insurance policy that uses indices such as the S&P 500 to determine the rate of return on investments made within the policy. The potential return is usually limited to a predetermined cap, while losses are generally protected from market downturns. Indexed Universal Life Insurance also offers flexible premiums and a wide variety of riders to customize coverage based on your individual needs.
Other variations of cash value life insurance policies include final expenses and survivorship life insurance. With so many different options, it's important to consult with a professional advisor to determine which policy best suits your needs and goals.
Premiums & Investment Components
When considering cash value life insurance, it's essential to understand the difference in premium payments compared to term life policies. Remember, premiums for cash value life insurance tend to be much higher than those for term life insurance because they include permanent death benefits and investment components.
Comparing Premiums Between Term Life Vs. Cash Value Policies
Term life insurance typically has lower premium payments as it only provides coverage for a specific period of time and does not have an investment component. On the other hand, cash value life insurance offers lifelong coverage with a built-in savings element that allows you to accumulate funds over time. These added features contribute to the higher premium costs with this type of policy.
Potential Benefits During Your Lifetime From Decreased Premium Payments
One potential benefit of the cash value feature is that you can lower your future premium payments using the accumulated funds within your policy. In other words, as your policy's cash value grows, you may be able to use these funds in various ways, such as paying off future premiums or even taking out loans against them at favorable interest rates.
In addition, some policies allow for "paid-up" options where once enough money has been saved within your account, no further premium payments are required to keep your insurance policy in effect. But, these types of riders, options, and features can be complex, so to learn more about how different types of policy options can impact your family’s finances, consult with a trusted advisor who specializes in this area.
Ultimately, a key benefit of cash value life insurance policies is that they can be tailored to fit your financial goals. You can pay off premiums and create a zero-cost policy using accumulated funds from investments within the account itself. But remember, with those added benefits come added expenses, so make sure that it’s a good fit for you before committing to a permanent policy.
Is Cash Value Life Insurance Right For You?
You likely need life insurance if you have dependents relying on you for income.
But, whether or not a cash value life insurance policy is right for you depends on a variety of different factors. On the one hand, cash value life insurance can offer peace of mind that you have permanent life insurance coverage and the ability to generate a return on your cash value. But, on the other hand, cash value life insurance can be expensive, often far exceeding the cost of a similar term life insurance policy.
Generally, because of the cost, complexity, and fact that most people don’t need permanent life insurance coverage, many advisors steer their clients toward a cheaper and more effective term life insurance policy. This can help you get the coverage you need, for the amount of time you need it, at a fraction of the cost.
That said, there are some specific instances where a permanent policy such as cash value life insurance may be worthwhile. Those include:
If you anticipate having a multi-million dollar estate at death. Permanent policies have some unique tax and estate planning advantages that term life insurance can’t offer.
If you are using a pension maximization strategy—selecting a higher pension payout option by declining spousal benefits, then using some of the excess payout to fund a life insurance policy for your spouse.
If you have special needs children or other permanent dependents. While many individuals and families will only have dependents for 20-30 years, some families will have permanent dependents and will need permanent life insurance to meet their needs.
If you want to guarantee a death benefit to your beneficiaries. Permanent life insurance can be one way to guarantee a set death benefit to your beneficiaries.
Ultimately, while cash value life insurance isn’t right for everyone, there are specific instances where it could be a good option. That said, most trusted advisors will recommend going with a term life insurance policy that can provide the coverage you need, for the time you need it, at an affordable and cost-effective rate.
Seeking Professional Advice
To determine whether cash value life insurance is right for you, consider consulting with unbiased advisors who specialize in different types of policies. An experienced, independent advisor can help you make an educated decision that best meets your needs and financial objectives.
Importance of Unbiased Consultation
Unbiased consultation ensures the advice is solely based on what's most beneficial for you. This allows you to make a well-informed decision when choosing between life insurance options such as term life vs. cash value policies.
Finding a Trusted Advisor Specializing in Life Insurance
Ask for referrals: Reach out to friends, family, or colleagues who recently purchased life insurance policies and ask about their advisor.
Leverage online resources: Websites like the National Association of Personal Financial Advisors (NAPFA) and the CFP Board offer tools to search for trusted and unbiased advisors in your area.
Evaluate credentials: Look into potential advisors' qualifications, certifications (such as CFP® certification), experience, and client testimonials before deciding.
Seeking professional guidance will help ensure you get the life insurance coverage you need, tailored to meet your unique situation while securing your long-term financial success. Remember, life insurance isn't about protecting yourself; it's about providing peace of mind and security for your loved ones in the event of an unexpected disaster.
FAQs in Relation to What is Cash Value Life Insurance?
What is ‘cash value’ in life insurance?
Cash value is a savings component in permanent life insurance policies that grows tax-deferred and can be used for loans or withdrawals during the policyholder's lifetime.
What are the downsides of cash value life insurance?
Downsides include higher premiums, potential fees and surrender charges, possible reduced death benefits, and investment returns that may not meet expectations.
What are the pros and cons of cash value life insurance?
Pros include lifelong coverage, tax-advantaged savings, flexible premium payments, and access to funds. Cons involve higher premiums, complexity in managing investments, potential fees, and lower death benefits if mismanaged.
Why is cash value life insurance not a good investment?
Cash value life insurance may not be a good standalone investment due to higher costs and potentially lower returns compared to other investments like mutual funds or stocks.
Conclusion
Cash value life insurance is a policy that provides lifelong coverage and an investment component.
There are different types of cash value life insurance policies available, with premiums and investment components that can be customized to meet your financial needs.
It's important to seek advice from a trusted advisor specializing in life insurance to make informed decisions about your policy.
