Cash Value (Permanent) Life Insurance

Cash value life insurance generally has higher premiums than pure term insurance. This is because a portion of the premium is used to pay mortality costs such as term insurance premiums, and a portion goes into a "savings account" for your benefit. That savings component is usually called "cash value" and can be used for supplemental retirement income, a source of emergency funding, to pay down a mortgage, etc. Unlike term insurance, with cash value insurance the death benefit is guaranteed to always be there as long as you pay the necessary premiums. Because of front-end expenses, our consultants recommend cash value insurance be purchased by those who plan to hold the insurance for long periods of time (at least 10 years).

Cash value life insurance has several tax advantages. The growth of cash values in a life insurance plan receive preferential tax treatment, since interest or growth is not subject to current income taxes. Cash withdrawals from a cash value life insurance contract are also accorded tax advantage. Moreover, some cash value life insurance contracts offer investment choices by allowing the customer to select how the money is invested among 10 or 15 "separate accounts". These separate accounts might include stock funds, money market funds, global growth funds, etc. Life insurance that provides these separate accounts is called Variable Life.

Cash Value Life Summary

Because there is no free lunch, cash value life insurance is more expensive than term life insurance. If you are going to have insurance protection and accumulate cash value, it will cost more. You might compute your insurance needs and find out that you need $500,000 of life insurance. However, you may not be able to afford this much cash value life insurance. What you may want to do in this situation is buy as much cash value life insurance as you can afford and buy term life to fulfill the remaining need.>

When buying cash value life insurance, one needs to weigh many factors. Have you made the maximum contribution to your tax qualified retirement plan (IRA, 401(k), etc.)? If you haven't, you should explore that option more fully, before you purchase cash value life insurance. If you are paying 20% interest on unpaid credit card balances, you should pay the credit cards off before making an investment in cash value life insurance. If the above situations do not pertain to you, and you want to accumulate some savings, cash value life insurance can make a lot of sense. That is why the majority of Fortune 500 companies use cash value life insurance to supplement their Executive's Retirement Programs. As indicated above, there are many types of cash value life insurance plans, and consumers should purchase the type that best matches their financial objectives.

Types of Cash Value Insurance

The four most popular types of cash value life insurance policies are listed below.

Universal Life
Universal Variable Life
Interest-Sensitive Whole Life
Participating Whole Life