Cash value life insurance explained: how the savings piece works

The short version

• Cash value is a savings component built into permanent life insurance policies.
• Part of each premium goes toward this account, which grows over time on a tax-deferred basis.
• You can borrow against it, withdraw from it, or use it to help pay premiums.
• Term life insurance does not build cash value.

Cash value life insurance is any permanent policy that sets aside part of your premium in an account that grows over time. Alongside the death benefit that pays your beneficiaries, the policy builds a savings component you can access while you are alive. This is what separates permanent coverage from term coverage, which is pure protection with no savings piece.

The cash value is not a separate product you buy. It is a feature of the policy itself, funded a little at a time as you pay premiums and left to grow on a tax-deferred basis.

In short: cash value life insurance is permanent coverage that builds a savings component you can use during your lifetime, on top of the death benefit.

The cash value grows slowly at first and then more meaningfully as the years pass, because early premiums go heavily toward the cost of insurance and setting up the policy.

A few points explain how it works:

• Part of each premium funds it. After the insurer takes its costs, a portion of what you pay is credited to the cash value.
• It grows tax-deferred. You do not pay income tax on the growth while it stays inside the policy.
• How it grows depends on the policy type. Some policies credit a fixed rate, some tie growth to an index, and some invest the value in subaccounts you choose.
• It takes time. Meaningful cash value usually builds over many years, so these policies reward a long horizon.

Because the growth method and guarantees vary widely by policy, please contact us to discuss your options.

In short: a portion of each premium funds the cash value, it grows tax-deferred, and how quickly depends on the policy type and time.

The appeal of cash value is that you can put it to work while you are still living, in several ways.

• Borrow against it. You can usually take a policy loan using the cash value as collateral. An unpaid loan balance reduces the death benefit.
• Withdraw from it. You may be able to take a partial withdrawal, though this can reduce your coverage and may have tax effects.
• Help pay premiums. Once enough has accumulated, the value can be used to cover premiums.
• Surrender the policy. If you cancel, you receive the cash value minus any surrender charges, though you give up the coverage.

Each of these choices has trade-offs for your coverage and possibly your taxes, so please contact us to discuss your options before acting.

In short: you can borrow against, withdraw from, or use the cash value to pay premiums, but each choice can reduce your coverage.

Cash value is a feature of permanent policies, and the main types differ in how that value grows.

• Whole life. Offers a fixed premium and a cash value that grows at a guaranteed rate set by the insurer.
• Universal life. Offers flexible premiums and a cash value whose growth is tied to a credited interest rate.
• Indexed universal life. Ties cash value growth to the performance of a market index, within limits.
• Variable life. Lets you invest the cash value in subaccounts, which means more growth potential and more risk.

Because these types behave very differently in cost and risk, please contact us to discuss your options.

In short: whole, universal, indexed universal, and variable life all build cash value, but each grows it in a different way with a different level of risk.

Cash value life insurance fits people who want lifelong coverage and are drawn to the built-in savings feature, rather than those who simply need protection for a set period.

It may be worth considering if you:

• Want coverage that lasts your whole life rather than a fixed term.
• Have already used other tax-advantaged savings options and want another place for long-term, tax-deferred growth.
• Value the ability to access money in the policy during your lifetime.
• Can commit to the higher premiums these policies carry compared with term coverage.

For many families, term life covers a temporary need at a lower cost, while cash value coverage suits longer-term goals. Because the right fit depends on your budget and goals, please contact us to discuss your options.

In short: cash value life insurance suits people who want permanent coverage plus tax-deferred savings and can commit to higher premiums than term.