What is cash value life insurance?

What is cash value life insurance?

A cash value life insurance policy is a little different from other life insurance policies. It’s still a life insurance policy, but it comes with a perk: a savings account that grows over time. Should you need a loan or some quick cash, you can access these funds.

It’s still primarily a life insurance policy, so should you die, your family will receive cash. It just comes with the savings account bonus.

There are numerous cons with cash value life insurance, but one is bigger than all others: any amount of money you’ve built up over the years doesn’t go to your family. Instead, it goes to the insurance company.

How does cash value life insurance work?

Each month you pay your premium. A little bit of your payment goes into a savings account. Over time it builds up to the point of being enough for you to do something with it.

For example, say you’ve built up a few hundred dollars in your cash-value account. Instead of paying the $30 a month premium, you could instead use that money to make your payments.

Types of cash value life insurance

There are three types of cash value life insurance policies. They are:

  • Whole
  • Variable
  • Universal

How to use the cash value from your life insurance

There are five ways you can use your cash value.

Make a partial withdrawal

You can withdraw money straight out of your cash-value account, but there’s a catch: when you do, the amount of money your beneficiaries receive when you die decreases. Even though it’s money that you deposited, if you use it, your life insurance policy goes down.

Take out a loan

You can take out a loan against the cash value you’ve built up. However, consider this: You’re going into debt over money that’s yours, and you’re paying interest on top of it. Should you be unable to pay it back before you die, your death benefit to your family will decrease.

Pay your premium

Use any amount of money you’ve accumulated to pay for your monthly premium. Depending on which life insurance company you work with, there may be a withdrawal fee to do so.

Sell your policy

Once all of your children have grown up or you don’t feel as if there is a need to have life insurance anymore, you can sell your policy for a cash settlement. The agent who set you up with your insurance will receive a cut from your settlement.