Just so we’re on the same track – life insurance can be pretty confusing, right? If there was just a way to breeze through it, minus all the hassle and the companies involved in the middle – wouldn’t it just be fantastic?

Coming to the matter at hand – Is cash value life insurance really worth the effort? Just to help you differentiate, there are two options when looking for life insurance policies – term life insurance and whole life insurance. Here, we’ll talk about whether whole life insurance really is a bad investment, or can it truly culminate into something fruitful?


What Is Cash Value Life Insurance?

Cash value life insurance policy is one that sets you up for a lifetime! It is not time bound, and involves monthly/annual premiums.

In this type of policy, you pay, mainly for two things. You pay for unforeseen circumstances – i.e. in case you may die, and you also pay for the savings account that increases the value of your money over time. The growth rate is pretty much dependent on the type of policy you decide to go for.


How Does Cash Value Life Insurance Work?

Cash value – despite how cool it may sound – is not a platform that serves your purpose 24/7. You can’t just withdraw cash from it anytime you want like an ATM machine.

Cash value functions in this manner: Suppose, you’re paying $100 per month for your cash value life insurance policy.  A small portion will be taken out to cover your life insurance policy, and the rest will go towards investments by the company.

There is a method to the breakdown i.e. the amount of investment in comparison to the policy contribution. In the earlier stages, a heavier percentage of your premiums contributes to the the cash value, and later on, your premiums will further incline towards the policy.

Insurance agents and companies will tell you that this entire scenario is a good thing – that all your money is being invested to secure a safer future for you and your family, however that is only if you stay alive. Upon passing away, all of those savings drain away.

Now here’s what happens – if you die, the savings are not going to your family. They will go to the company. And this is a smart move in the sense that people don’t generally tend to withdraw cash from their policy while they’re still alive.

Another important fact to note is that you will not get any money during the initial stages, because of all the fees, expenses, commissions and costs you’re paying to the insurance company just to get insured in the first place!

Now let’s look at some of the types of life insurance policies:


Types of Cash Value Life Insurance


Whole Life Insurance

Whole life insurance plans are generally the most non flexible. There is no way you can change the amount of premium that you have decided upon. As per your agreement, you pay the set amount your entire life. The percentage rate of return is set when you take out the policy, and is usually in the 2% range. So, the longer the policy is in your possession – the more cash value you will have.


Variable Life Insurance

Variable life insurance policies are even more complicated than the one mentioned above, in the sense that they leave the choice of deciding how your cash value is invested entirely upto you, as compared to the other two, that are fixed. This could be in stocks or bonds. So more power to you, but now you need to be more cautious too! Since variable life insurance is also very expensive in terms of fees, you won’t get back much cash value initially.


Universal Life Insurance

Universal life insurance is different and a bit more complicated as compared to whole life because it comes with so called “flexible” premiums and death benefits. Hence, you can ascertain a certain amount of control over your premiums. For example, if for some month, you have more cash than usual and want to contribute to your life insurance policy, you can do so by paying more of the premium for that month, and have the difference go into the cash value side of your policy. And with more cash value over time, your premiums could be reduced.

There are three types of universal life insurance policies: Variable Universal Life, Guaranteed Universal Life and Indexed Universal Life. And how much money builds up in your account over time depends on the nature of the policy you have opted for, and agreed upon.


How Do I Access the Cash in Cash Value Insurance?

As mentioned above, cash value comes with the price of time. There is no way you can get your hands on the cash initially, and even so it takes at least 10 – 15 years for your cash value to really accumulate and build up.

So how can you take out your life insurance?


  1. You can take out a loan against the cash value

  • With whole life insurance:

This straight up results in debt and loans, which is a headache you do not want to get into, hence it is is the worst thing you can do. Furthermore, there is a rate of interest on the loan, and if it isn’t paid back, it will lead to a reduction in your death benefit – which was the only purpose of the life insurance policy all along. So you’re paying interest on a loan made up of your own money!


  • With universal or variable insurance:

The same principles are levied here. If you take out a loan, there will be interest that you have to pay, and if you don’t, then simply, your death benefit will decrease.


  1. You can make a partial withdrawal

This is the next best thing, because you will actually get your hands on some cash.  However, if you withdraw cash and don’t put it back in, once again, your death benefit will decrease.


  • With whole life insurance:

With a whole life insurance policy, you will have to surrender and give up the policy if you want to get your hands on the money. This means all the effort was for nothing!


  • With universal or variable insurance:

A partial withdrawal is very similar to getting a partial amount of your death benefit earlier than expected. Hence, it is also subtracted from the death benefit. In case an amount adds up to less than what you’ve paid in premiums, there won’t be a tax, and if you’ve built up cash value, you can’t withdraw more than 85%.


  1. You can surrender the policy


  •  With whole life insurance:

So, the last resort option is to just give up the policy. Let’s say, you decide it isn’t worth it, and want back your cash value that’s built up. This may sound simple, but is a rigorous process – you’ll have to pay a fee to the insurance company, and you’ll be taxed on the amount you receive if it’s more than what you’ve paid in premiums over the years!


  • With universal or variable insurance:

The results are just the same as with a whole life insurance policy. Lots of fees are involved, and no coverage!


  1. You can sell your policy for a life insurance settlement


  • With whole life insurance:

You can even sell your policy. Instead of surrendering your policy, you could sell it for a cash settlement, in case of your premium being too high, etc. However, the broker or middle – man who sets you up with the company that buys your policy will get a cut from your settlement amount.

Your settlement, i.e. the cash you really take home will be a lot less than your agreed death benefit. Although a company may try to sugar coat it and tell you that it’s more than your cash value – don’t buy it, because it’s your money, and was your money throughout!


  • With universal or variable insurance:

With universal or variable, you will have to pay taxes if the cash value exceeds the premiums you have paid.



  1. You can pay your life insurance premium with the cash value


  • Whether you have whole life or universal/variable insurance:

Some people use their cash value to pay for the monthly premium itself. This is not smart financial planning at all.

Just notice how everything comes with a major catch and a price. You’ll either give up your death benefit, deal with a heavy tax, or pay a fee. The company always values its interests above yours. Simply giving you the cash value violates that principle. This is a money making scheme, and another reason to stay away from this.


  • The Main Difference Between Cash Value and Term Life Insurance

Let’s talk about a middle aged man, is pretty healthy, and wants life insurance. But he is extremely confused with the vast pool of options out there.

He is thinking long term, and wants a life insurance policy that best fits what he needs, given his scenario. Now, given that, he would want something that is reasonably affordable, lasts, and has no cash value (given the description of cash value above). So what are his options?

When it comes to HIS death benefit, term life offers upto 4 times as much coverage as a whole life insurance policy. And he’s also paying a lot less than your standard premium for it! If he follows our advice in terms of investing and paying off his debts, he would attain the level of being self insured and wouldn’t need to fall for a pretty scam. The fact of the matter is, that he’s paying a whole lot less, and gaining a whole lot more!


What Happens to the Cash Value When You Die?

Cash value insurance is genuinely just a sugar coated façade, that leads to no benefit and comes with a baggage of a hundred conditions. As mentioned above, your cash value means nothing if you are no more. Your family gets no share of it, and all of it goes back to the company.

Think about that for a second.

This is how these whole life insurance companies make money off your investments and make it seem so lucrative just because they sell it as a policy that lasts your entire lifetime. It is simply a waste of your money and time, and just a way for them to mint money off your interests.


Is Cash Value Insurance a Good Way to Boost Your Retirement Income?

By now, you must have realized that this is a straight up no. This is an expectation you should not have, nor a hope you should cling to. You will have to wait10–15 years before your cash value is built up and even ready for use, excluding all the fees and overhead costs you have to pay for the policy.

Therefore, one of your best options is to but a term life insurance policy and chip in 15% of your family income into a good mutual fund or Roth IRA (an individual retirement account).


What Life Insurance Do We Recommend?

It has been established up to this moment, that life insurance is NOT to be taken as an investment, and that is not the mind set you should walk in with when purchasing a life insurance policy for yourself.

Please know, that with cash value policies you are literally tossing away your money, when in modern ways, you have far more profitable ways to invest and reap profits as well as benefit from the situation rather than being exploited at the hands of an insurance company.

If you are subject to debt, and in any way perceive that cash value life insurance will help you out of it or assist you in any way – you are mistaken and need to reconsider your options. Make your cash work for you, and make the most out of it. After all, it is YOUR money, and your hard work that you are putting in for a good cause.


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