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Is a Cash-Value Life Insurance Policy Right for You?

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Most life insurance policies are simple: You take out a policy for a set face value and a specific number of years.

Term life insurance

Maybe you take out a term life insurance policy for $500,000 that lasts for 30 years. You make your premium payments each year until the policy expires. If you die before the term ends, that $500,000 payment is made to your beneficiaries.

Cash-value life insurance

A cash-value life insurance policy works the same way but also has an investment portion.

With this type of policy, a portion of each of your payments goes toward building your policy’s cash value. This cash also earns interest so that it can grow over time.

You can then access that cash throughout your policy’s term.

  • You can take loans against it to help fund big expenses, such as paying for a child’s college education or covering a major home repair.
  • You can also make withdrawals from your policy if you need extra money.
  • You can also use the cash that you’ve built to pay your policy’s premiums.

Unlike term life insurance policies, cash-value life insurance policies typically last your entire life.

Is a cash-value life insurance policy right for you?

For most people, the goal of life insurance is to protect loved ones. If you die suddenly, you want a life insurance policy to provide your loved ones with a financial payout that they can use to pay off a mortgage or cover other major expenses. The goal is not usually for a life insurance policy to earn interest or generate cash.

If you are most interested in providing a financial safety net to your beneficiaries, a term life insurance policy is usually the better choice.

That’s because cash-value policies come with some drawbacks that make them more expensive than term life and, in most cases, less effective at providing for your loved ones.

  • Reduced death benefit. First, the withdrawals and loans you take from a cash-value policy can reduce your policy’s death benefit — the funds paid out to your beneficiaries after you die. These policies are helpful if you need access to cash for a big expense. But accessing that cash could mean that your loved ones receive a smaller payout when you die. You’ll need to weigh that trade-off.
  • Come with higher premiums. Second, cash-value policies tend to come with higher premiums. Because they generate cash and interest, they are more expensive than term life policies. This can negatively impact your day-to-day cash flow.
  • Returns may be lower. The returns that you earn on a cash-value policy might be lower than if you had invested the extra money you spend on such a policy in other investments.

Cash-value life insurance policies might be a good fit for people who earn a high income and have already maxed out their contributions to IRAs, 401(k)s, and other retirement accounts. But for most people, a more affordable term life insurance policy remains a better option.

No matter what you choose, having any life insurance coverage in place is a critical step toward protecting your family’s financial future. To learn more about protecting your family’s future estate planning, sign up for a future workshop to learn about the strategies that can help you.

Miranda Dressler
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