Cash value life insurance is a policy that contains an account that builds value over time. It's good for people who want an additional investment vehicle plus a death benefit for beneficiaries. But cash value policy types are very different and you want to choose the right one so you don't end up with a policy you can't manage.

How to get the cash value:

  • You can withdraw some of the cash or take a loan against it.
  • If you decide you don't want the policy anymore, you can take the "cash surrender value."

What you could do with the cash value:

  • Pay for a child's college tuition
  • Supplement your retirement income
  • Pay large, surprise bills
  • Use it to pay your life insurance premiums, once you've built up enough

Life insurance policies with cash value

Cash value policy Summary
Whole life insurance The cash value grows at a guaranteed, expected rate of return. It's for someone who wants no surprises.
Indexed universal life insurance The cash value gains are linked to an index such as the S&P 500. It's for someone who wants to participate in the financial markets and is open to some risk with the money.
Variable universal life insurance The cash value growth (or loss!) is tied to "sub-accounts" where you pick your own investments, such as stock or bonds. It's for people who want to actively manage the investments and who are OK with high risk.

More: Universal life insurance: Types and 2018 rates

Not all life insurance policies have cash value. These don't:

  • Term life
  • Guaranteed universal life

What to know about cash value life insurance

  • A portion of your premium will go to fees and expenses. Not all your premium goes into cash value. Thus, the money could build very slowly for the first several years.
  • When you die, your life insurance beneficiary generally gets the face amount of the policy, not the face amount plus cash value. (There are some policies that supply both, for a higher price.)
  • If you take a loan or withdrawal against the cash value and don't pay it back, the death benefit for your beneficiaries will be reduced by that amount.
  • If you have regrets immediately after buying a life insurance policy of any type, you can return it for a full refund if you act fast. "Free look" periods generally last 10 days.

How fast does cash value grow?

The rate of growth depends on the policy and the guarantees in it. Examine the policy illustration -- this will show you both the guaranteed (minimum) and nonguaranteed values over time. Make sure you understand what the guaranteed amounts are, in case that's all you ever get in a worst-case scenario. Some policy illustrations can be very complex.

Don't buy a policy you don't understand. Consult a fee-based financial advisor if you want help navigating the choices of cash value policies.

Do you need cash value life insurance?

If you're thinking about life insurance because you have a specific financial obligation you want to cover, you probably don't need to pay the higher cost for cash value life insurance. For example, term life is a good fit if you want to have life insurance for:

  • The years until you retire
  • The years until children graduate college
  • The years you're paying off a mortgage or other debt
  • All of the above

You can buy term life insurance to match the length and amount of financial commitments.