When it comes down to it, life insurance is all about money: saving money, protecting money and assigning money to the right beneficiaries. Going with the most economical policy is probably the route you’ll want to go down when you purchase a life insurance plan. Cash-value life insurance is one policy that has caused many people to experience excellent results. However, it’s not for everyone.

Although accumulating cash value might sound like a good idea, you’ll need to do some research to determine whether or not a cash-value policy is worth it for you. Not only is it more expensive than a term life insurance policy, it might also include some higher risks, depending on the policy you choose.


What Is a Cash Value Insurance Policy?

“Cash value” is the savings you accumulate through a permanent life insurance policy. A cash value life insurance policy costs more than term life insurance, as it protects you for life and funds a cash value account. The cash value gives you some options and flexibility. You can make partial withdrawals, borrow against the cash value, use it to pay premiums, or even withdraw all the cash value and give up your policy altogether.


Cash Value for Different Types of Permanent Life Policies

The way in which your cash value increases varies based on the type of permanent life insurance policy you have.

  • Whole life insurance: With this policy, you will be guaranteed a fixed rate of return on your cash value.

  • Variable universal life insurance: Your cash value will be invested in different stocks, bonds and mutual funds. This policy is the highest risk when it comes to losing or gaining cash value, but it also has the best potential returns.

  • Indexed universal life insurance: The growth of your cash value is dependent on a stock index.


What Policy Does Not Include Cash Value?

Term life insurance policies only cover policyholders for increments of time, such as 5 years, 10 years, or 30 years, and does not include a cash value. The only way a term life insurance policyholder will make money is if he or she passes away during the period of time the insurance covers. The main selling point of term life insurance is its affordable price.


Is It Right for You?

Deciding if you want a permanent or term life insurance policy is the first way to determine whether or not you’re interested in a policy that includes cash value. If you opt for a permanent life insurance policy, this is where things get trickier. Making the choice between whole life, variable universal life and indexed universal life is more technical.

A whole life policy is the most simple permanent policy, as your annual price, death benefit and return on cash value are fixed and guaranteed. Indexed universal life and variable universal life allow you to change up your premiums and coverage amounts. Since they rely on stocks, they are riskier than a whole life policy, but the former is less risky than the latter.

Most young families purchase term life insurance, as it is the least expensive option. From there, they can purchase whole life insurance once their term ends to ensure they are getting coverage. In addition, a cash-value life insurance policy is usually the best option if a family has saved a good chunk of money into their savings, IRAs and 401ks and if they are willing to commit to this policy for a long time. With a term policy, it’s not tough to back out of it, but with cash-value life insurance, opting out of it can be pricey. That being said, don’t invest in this policy until you are completely sure it’s the right move for you and your family.

Since cash-value life insurance adds a whole different component – the cash value itself – it is more complicated to understand than term life insurance is. For that reason, many people find it helpful to hire a financial advisor to make sure this is the right decision for them. If they want to purchase a cash-value life insurance policy, it’s best for them to work directly with a life insurance agent who will walk them through their options.