When it comes to the different types of life insurance, there is no one size fits all option. Each person and their finances require a different policy with different features.
Cash value life insurance is a kind of permanent life insurance. There are two main parts to it: a death benefit and a savings or investment pool. The death benefit is what will pay out to your family when you die.
Not all life insurance policies come with a cash value feature, but ones that do include universal life insurance, variable universal life insurance and whole life insurance.
Generally, cash value life insurance is more expensive than term life insurance as you are paying for coverage that lasts a long time as well as contributions in cash that you can dip in and out of while you are still alive. It can be useful for high-income earners as well as retired persons who are no longer earning. Parents could also benefit if they need to take money out for expensive health care or college tuition fees at some point.
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What kinds of life insurance policies come with cash value?
Three of the most common types of permanent life insurance that come with cash value are whole, universal and variable universal. Each of them builds its cash value in a different way.
- Whole life insurance: is one of the most common life insurance policies to come with cash value. You will pay regularly to receive a death benefit as well as cash value. The policy will usually continue until you stop paying or surrender your policy. There will be a base interest rate that increases your cash value over time.
- Universal life insurance: this provides a death benefit and a cash value. Like whole life insurance, the policy will generally stay active for as long as you continue to pay into it, however, universal policies generally have a lot more flexibility in the amount paid in each premium. You are usually able to adjust your payments as you need to and alter payment times if necessary. Interest will usually increase along with the market, keeping your money safe as time goes on.
- Variable universal life insurance: As you would expect, this is the kind of policy that comes with the most features. It offers a death benefit and cash value as well as a range of investment options. It gives similar flexibility when it comes to timing and the frequency of payments as universal life insurance, but also offers sub-accounts for investment to allow users to invest their policy’s cash value. This could, however, lead to the market influencing how much money you are saving and how well it is accumulating.
Permanent life insurance vs. term life insurance
Depending on your own personal finance goals, you may find term life insurance or permanent life insurance more suited. There are so many different types of plans out there and each comes with its own features, so shop around to work out which is best suited to you. Weigh up the pros and cons and try to determine if a contract that continues as long as you are paying in (such as a cash value policy) or one which has a set term is better for your own needs and goals. Evaluate all of the different features offered in different plans too to really decide on the best type of life insurance for you and your finances.
Why would you access your insurance cash value?
Usually, if people are removing money from the cash value section of their life insurance policy it is because they need access to money that could be free of income tax. This is done either through a loan or through a cash value surrender.
Often, this will be done to help people fund some major expenses in their lives, such as funding college for themselves or a child, transitioning into living in retirement, putting a downpayment on a house, or even being used as an emergency fund.
How to quickly increase your cash value
If you want to begin building the cash value of your life insurance premium faster, then you should start by increasing the size of your payments, assuming you have the money and your policy allows it. If you have a policy that doesn’t allow it, then other options for increasing your cash value could be to have a paid-up addition rider. This will allow you to increase your death benefit by increasing the payments you are putting into your life insurance. It may come at a fee, but is a good way to add to your cash value if your policy is slightly less flexible.
