What is cash value life insurance?

Cash value life insurance refers to permanent life insurance policies that include a savings feature. A portion of every premium payment goes into an account that collects interest over time. As your policy's accumulated cash value grows, you can use it to make premium payments, borrow money, or even withdraw cash.

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What kinds of life insurance policies accrue cash value?

The cash value feature is included on permanent life insurance types like whole life insurance and universal life insurance. Since final expense life insurance is a type of whole life, it can also have cash value and can be a more affordable option for obtaining a policy with cash value. Note that term life insurance doesn't include a cash value component.

To learn more about cash value life insurance vs. term, see the differences between term and permanent life insurance.

How does cash value life insurance work?

When you make premium payments on a cash value life insurance policy, part of your payment is allocated to the policy's cash value savings component, which increases in value over time. Exactly how your cash value grows varies by policy:

Whole life policies grow their cash value via a fixed interest rate
Universal life policies grow their cash value at a rate more dependent on the market (but with a guaranteed minimum rate).
Variable life insurance policies accrue cash value based on a selection of investment options, offering the potential for greater returns but also greater risk.
Indexed life insurance policies are similar to variable life insurance policies. The cash value is put toward an equity index account that tracks the performance of a specific market index, like the S&P 500 or NASDAQ.

Depending on the type of life insurance policy you have, your cash value can be used in different ways. If you have whole life and your cash value grows to equal your death benefit amount, your insurer will automatically terminate your policy and pay out the death benefit to you. If you have universal life, your cash value has the potential to result in a zero-cost policy — that means all premiums are paid from the built-up cash value. Both types of policies have cash value that can be used as a life insurance loan once it grows to a certain amount.

Pro tip:

The cash value insurance feature is generally designed to benefit you while you're still alive — by providing you with a loan option and a way to potentially decrease your premium payments. Your cash value will not affect your death benefit amount unless your policy specifically allows for the cash surrender value to be added to your death benefit (which can significantly increase your premium).

How do I use my life insurance policy's cash value?

You can use your cash value in a variety of ways. However, some uses may result in changes to your death benefit amount or even end your life insurance coverage:

Sell back your policy: You may be able to fully cash in your life insurance while you're still alive by selling back your policy to the insurer in exchange for its cash surrender value, some of which may be taxable. If you cash in on your policy, your coverage will end and a death benefit will not be paid upon your passing. Consult with a financial advisor to determine your options and the tax and fee implications for cashing in on your life insurance policy.
Take out a loan: If you want to maintain coverage while accessing some of your policy's cash value funds, find out if it has grown enough for you to borrow against the policy. You can then pay back this loan with interest (or have the owed amount subtracted from your death benefit when you pass away). Note that if you borrow the full cash value of your policy (or possibly a lesser amount set by the insurer), it may result in termination of coverage — essentially selling back your policy in exchange for the cash value.
Partially withdraw your funds: You may withdraw a portion of your cash value, though you must repay the amount taken to avoid reducing your death benefit amount.

Benefits of cash value life insurance

Financial flexibility: Cash value life insurance gives you an additional financial asset you can leverage for loans, major expenses, and more.
Use it to pay your premiums: Some cash value life insurance, like universal life, allows you to use your policy's cash value to pay your premiums (once the value is sufficiently high enough).
Low borrowing rates: Interest rates for life insurance loans are typically lower than those offered for conventional loans.

How to get cash value life insurance

You can get a life insurance quote and compare rates online. You'll answer some questions, and then you'll choose your coverage amount and other policy details. You can also call 1-866-912-2477 to speak with a licensed Progressive Life by eFinancial representative who can help you find the right policy for you.