Do All Life Insurance Policies Have a Cash Value?

When we think of life insurance, we often think of it simply in terms of a policy that pays a benefit to a named beneficiary upon the death of the insured. It's often a plan that can help families continue their way of life if a parent dies, especially if that parent is the primary earner for the family.

What doesn't always come to mind with life insurance is that in many cases, it can also be used as a financial tool if it's a policy that builds cash value. But do all life insurance policies build cash value? It depends on the policy. 

Types of Life Insurance

There are two categories of life insurance: term life insurance and permanent life insurance. Like their names imply, term life insurance provides coverage to the insured for a certain period of time; permanent life insurance provides coverage to the insured for his or her whole life.

There are three different kinds of permanent life insurance: whole life, universal life, and variable life. Generally, these permanent life insurance policies build cash value. Term life insurance policies can also have a cash value feature. It's important to have a thorough understanding of any life insurance policy you buy, particularly if it has cash value and how it accumulates.

How Does Life Insurance Build Cash Value?

The cash value of your life insurance policy builds when you pay your premium. A portion of your premium will go toward the death benefit, a portion will go toward the cash value, and a portion toward expense charges.¹

Why Build Cash Value?

Once you've been paying your premiums for a certain period of time and have accumulated enough of a cash value, you can use that cash value for a number of things. You can use the cash value to take out a loan, pay your policy premium, or increase your retirement income.

If you use the cash value to take out a loan, according to Forbes, it's tax-free and it can be paid back with interest.² Forbes also notes that "if you make a withdrawal, there are no taxes as long as your withdrawal is less than the portion of your cash value that's attributable to premiums you've paid," and "if your withdrawal is greater, you'll owe taxes on the difference because those are investment gains."

If you do not pay back money you take out as a loan, it can reduce the death benefit of the policy.

Different policies accumulate cash value differently, and it's important you understand how your policy works. If you have any questions about your policy or if you're thinking of purchasing a policy that builds cash value, contact a licensed insurance agent.

Sources:
¹ Forbes, What to Know About Cash Value Life Insurance, 2020
² Forbes, Forbes Guide to Whole Life Insurance, 2020