What is permanent cash value life insurance?
Cash value life insurance is a type of permanent life insurance that includes an investment feature. Cash value is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.¹
It's also worth noting that cash value will not build up quickly. It may take 10 years or longer before your policy is worth enough for you to reap the benefits. Additionally, the cash value of some policies will revert to the insurance company upon your death.
Examples of Cash Value Life Insurance
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.
Cons. More expensive than term life insurance. Some policies charge high internal fees that eat into your potential cash value. Likely not a good choice if you need life insurance for only a specific period of time.
How long does it take to build cash value on life insurance? The length of time varies by insurer, but in most cases, cash value does not start to accrue until you have paid premiums for two to five years.
How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000. However, this is only an average.
Cons explained
Loans may reduce the death benefit: Withdrawals and unpaid cash value loans can reduce the death benefit for your heirs. And, if you take out all the cash value and stop paying premiums, the coverage lapses, and you lose the life insurance protection altogether.
What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.
Can You Cash Out a Life Insurance Policy? With a cash value life insurance policy, like whole life or universal life insurance, you can access the cash value. One of the ways to do that is to cash out or surrender the policy. If you choose to cash out your policy, you'll receive the cash value minus any surrender fees.
With variable universal life insurance your cash value growth is tied to sub-accounts containing investments of your choice, usually bonds and mutual funds. But you could lose money in the cash value based on the performance of the investments you choose.
At what age should you get permanent life insurance?
People between ages 40 and 60 may benefit from a permanent life insurance policy that offers protection for their lifetime (as long as premiums are paid). Life insurance for middle-aged policyholders may be geared toward helping a spouse pay down the remaining amount on a mortgage and pay off other debts.
You'll typically pay less for life insurance at age 25 than at age 40. Waiting until age 60 may mean an even bigger rate increase and limited policy options.
Permanent life insurance: pros and cons
For example, if you know you'll have lifelong dependents, such as a child with a disability, or want to help your heirs pay hefty inheritance or estate taxes or even funeral costs, a permanent life insurance policy is probably the way to go.
How much does whole life insurance cost? A 30-year-old in good health could pay about $451 per month for a whole life insurance policy with a $500,000 coverage amount. Generally speaking, whole life is significantly more expensive than term life insurance.
The good news for a whole life policyholder is they don't have to pay income taxes each year on the growth in their plan's cash value. Similar to retirement accounts, such as 401(k) plans and IRAs, the accumulation of cash value in a whole life insurance policy is tax-deferred.
Whole life insurance may be the best type of coverage if you are looking for guaranteed support for your loved ones on any timeline.
After the 20-year level term ends, your coverage expires. By outliving your policy, both the death benefit and two decades of premiums are lost. Terms are available in different lengths, typically from 10 to 30 years, so it's important to select one that you think will be sufficient for your financial needs.
How much is a $5 million life insurance policy? A healthy 40-year-old woman could pay $251 per month for a $5 million, 20-year term life insurance policy. A 40-year-old man with a similar profile could pay $316 per month for the same coverage. Your age, gender, health, and lifestyle will influence your rates.
You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.
Cash value whole life insurance can enhance your retirement income, because it accrues guaranteed cash value that you can access later in life as your insurance needs decrease2. You will owe taxes on 401(k) distributions, but you can generally access your insurance policy's cash value federal income tax free.
Is cash value insurance a good idea?
Typically a feature of permanent life insurance, cash value provides funds you can borrow against or withdraw. Policies with cash value cost more than term life insurance, which rarely accumulates interest. If you want another income stream later, however, the higher premiums may be worth it.
- Make a withdrawal.
- Take out a loan.
- Surrender the policy.
- Use cash value to help pay premiums.
How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.
But it's important to be aware that there are a few instances where life insurance won't pay out. Top reasons life insurance won't pay out may be because the policyholder lied on their application, their death was the result of suicide, or they passed away during the waiting period.
In most cases your premium payments will be forfeited, and you will not receive anything for your previous payments. The one exception to this is if you have whole life insurance and cancel it. You may have built up equity for all of the payments you have made so you may receive a lump sum payment from your insurer.
