What is cash value life insurance?

UPDATED: Jul 21, 2010

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UPDATED: Jul 21, 2010Fact Checked

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Asked July 21, 2010

1 Answer

Cash value life insurance is a type of whole life insurance policy that builds value over time. The advantages of such a policy might include an increasing pay out value, or the ability to use the savings portion of the policy as a supplemental income in later years. Disadvantages include a much higher expense than with a term life policy, and susceptibility to market fluctuations.

If a person takes out a cash value life insurance policy at age 30 and allows it to accumulate with the minimum premiums for a number of years, they will see that the cash value has continued to increase at a rate higher than the premium contributions. Since a life insurance policy if tax-deferred, the policyholder can borrow against or increase the amount of the policy without paying the taxable consequences. Some insurance agents refer to this as a tax-free savings account.

In many circles, cash value life insurance and whole (or permanent) life insurance indicate the same type of policy. While it is true that all cash value policies are whole life policies, it is also important to note that there are many types of whole life insurance policies, and each one behaves somewhat differently. A universal whole life policy, for example, gives the policyholder the freedom to manipulate the investments of the account, where an ordinary whole life policy may not have the same flexibility.

Answered July 21, 2010 by Anonymous

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