Cash value life insurance is a type of insurance policy which offers death benefits along with an added cash component that keeps accumulating over the lifespan of the individual. In other words, it is the insurance policy which offers protection cover as well as a cash component. This is different from normal life insurance policies where the individual doesn’t get the premium back or any part of it, if the individual outlives the time period for which the policy was taken. So, the cash value life insurance policy is in a way permanent as it is valid throughout the lifespan of the individual and whose benefits can be passed on to the heirs of the insurance policy holder.
In this, the individual keeps paying either a fixed or variable premium, part of which is allocated to the cash value. The interest accrues over this amount over a period of time and ultimately pays out for the insurance itself, thus allowing the individual to stop paying premiums. The policy is usually for a timeframe between 10 – 30 years. It is ideal for those cases, where an individual wants to own a life insurance policy for protection and death benefits to his or her beneficiaries owing to the fact that there are liabilities or loans that need to be paid out.
Cash value whole life insurance is a good example of this kind of policy. The other two common types are variable life insurance and universal life insurance policies. In variable life insurance, a part of the premium is invested in portfolio funds. The universal life insurance offers greater flexibility over the whole life insurance policy allowing the policy holder to determine the death benefits and also choose between insurance protection and using up premium for savings and accruing interest. However, in both variable and universal insurance policies, the amount of cash value is directly dependent on the market conditions. There is higher risk involved and also a potential for greater returns. In variable insurance, if the portfolio including bonds, equity and mutual funds perform well, cash value is enhanced quickly. Similarly, if the rate of return is higher in the market, universal life insurance can provide a greater cash value component that can pay for itself.
Whole life insurance is steadier on the other hand with a guaranteed death benefit. There is less flexibility offered to the individual in choosing the savings element and the death benefits in this case. Cash value life insurance policy therefore allows policy holders to choose if they want a steady investment with lower returns and assured death coverage or higher returns with a greater risk. In fact, in case of variable and universal life insurance, the policy could lapse if cash value doesn’t cover for the charges and fees that are due.
It should also be noted that this insurance policy isn’t worthwhile as a financial instrument alone as the rate of return is lower. This is because part of the premium is allocated for the death benefit coverage. However, there are good tax benefits involved and individuals can use this as an investment fund that can be passed on to beneficiaries. It is ideal for those who want an insurance protection and also want to use that money for investment. Similarly, it is also a good retirement option as the cash value component can grow substantially in a period of 10 – 20 years or even more. The slightly expensive cash value insurance can be used as collateral to borrow from financial institutions.