What is Cash Value Life Insurance

Cash value life insurance is the value of the cash portion of a whole life insurance policy. Whole life insurance is a type of permanent life insurance. It remains in force for as long as the policy owner is alive and as long as he or she pays the premiums. Unlike term life insurance, which is only in force for a defined period of time and does not build cash value, permanent insurance builds cash value over time in an investment vehicle that is separate from the insurance portion of the policy.

» Get Quotes for Cash Value Life Insurance

Premium Explained

The premium that is paid for a whole life policy is applied in two parts: First, a portion is used to cover the cost to the insurance company of providing the insurance. The second portion is credited to the cash value account. The cash portion of the account grows tax-deferred. For this reason, many people purchase a cash value life insurance policy as part of their retirement planning.

The face value of a cash value life insurance policy is the amount of the death benefit. For example, a policy with a face value of $300,000 would pay $300,000 to the beneficiary or beneficiaries at the time of the insured’s death. In most cases, this amount passes to the beneficiary or beneficiaries tax-free without having to go through probate. The cash value, however, can be taken out of the policy by the policy owner and distributed as he or she wishes. He or she may choose to take the cash on a regular basis to pay expenses, or he or she may choose to pay the premiums with the cash value.

What is the Difference Between Cash Value Life Insurance and Term Life Insurance?

Cash value life insurance is permanent insurance that builds equity over time. A portion of the premium is invested in a variety of different investments with the goal of increasing the value of the account. The insurance portion of the contract only comes to an end if the premiums are not paid or if the insured dies. Term life insurance neither builds cash value nor remains in effect for an entire lifetime. It is also less expensive than permanent insurance.

Term life insurance is purchased for a specific period of time. For example, a 35-year-old man with a wife and 5-year-old child may purchase a 20-year term policy. A term of this length may be enough to cover an outstanding mortgage and the child’s college education. Once the mortgage is paid off and the child graduates from college, there may be no more need for the insurance. He can, however, convert the term policy into a cash value policy at some point during the term if he chooses. This is especially critical as he acquires additional assets over time.

What are the Advantages of Cash Value Life Insurance?

The cash portion of a cash value life insurance is not subject to income tax. Further, the equity that builds up over time can be borrowed against or used as collateral for a loan such as a mortgage. A loan from a cash value life insurance policy is usually treated as a debt and not as a taxable distribution. This is significantly different than a distribution from other types of financial investments such as individual retirement accounts. One drawback to borrowing against the policy is that interest will be charged on the loan. And, if the loan or loans are still outstanding at the time of the insured’s death, the amount of the death benefit will be reduced.

Cash value life insurance policies are also often recommended for business owners. A partner can be named as the beneficiary on the policy so that he or she can buy out the insured’s share at the time of his or her death. Or, the surviving partner can use the proceeds to pay off debts and wind the business down in an orderly fashion. This can help prevent the assets of the business being sold at reduced rates to satisfy tax liabilities.

As long as the beneficiary or beneficiaries are named as other than the estate, the proceeds from a cash value policy are paid tax-free. In other words, if a spouse or child is named as the beneficiary, he or she will not have to pay tax on the death benefit he or she receives. If, however, the estate is named as the beneficiary, the proceeds become part of the estate and are subject to estate taxes. For this reason, anyone seeking to purchase a cash value life insurance policy is advised to consult with a properly trained life insurance agent or certified financial planner in order to structure the contract correctly.

Cash value life insurance policies are also extremely useful for those individuals with large estates or significant assets such as real estate, securities or cash. As the inheritance tax, also known politically as the “death tax” can be substantial on some estates, a cash value policy can provide the necessary cash to pay the tax liability. This may prevent a spouse or child from having to sell a family business or residence simply to pay the taxes.

What Companies Offer Cash Value Life Insurance?

Almost all life insurance companies offer cash value life insurance. Some of the larger companies in the United States are Allstate, Colonial Penn, MetLife, New York Life, Prudential and State Farm. Because a cash value life insurance policy is as much investment product as it is insurance product, investors are always advised to make sure the company from which they purchase the policy has been given high ratings from A.M. Best, Moody’s Investors Services and Standard and Poor’s. These companies issue ratings based on the financial strength and stability of the insurance company. Since a cash value policy represents a future liability to the insurance company, it’s important to know that the company will be able to meet its financial obligations 20, 30, 40 or more years in the future.

To find the best life insurance products request a free, comprehensive quote comparision. Secure your future today, Get Started Now.