What Is Cash Value Life Insurance?

There are two primary types of cash value life insurance: whole life and universal life. Both provide the many benefits of cash value, but differ in other respects. If you’re considering life insurance, it’s in your interest to understand how cash value works, as well as the key differences between whole life and universal life insurance policies.

Understanding Cash Value and Its Advantages

Here’s how cash value works: when policyholders pay their premiums, one portion funds the cost of the death benefit, and the remainder flows into the policy’s cash value account, which accumulates over time.

Policyholders can access their accumulation through policy loans, withdrawals or by surrendering the policy to obtain its surrender value.

Cash value is tax deferred, which means you don’t need to pay taxes on the gains as long as the funds remain in the policy. In addition, policy loans generally are not subject to income tax.

Many policyholders earmark their cash value for a specific purpose: as their emergency fund, college fund, or to save for future retirement.

This is true of both whole life and universal life policies. Now, now let’s review their differences.

Whole Life vs. Universal Life Insurance

There are several key differences between whole life and universal life insurance, specifically:

Fixed vs. Flexible Premiums – Whole life insurance offers fixed premiums, which means they stay the same throughout the life of the policy. Universal life offers flexible premiums, giving policyholders the freedom to adjust their premium payments within certain limits (i.e., the policy must retain enough cash value to cover actual policy costs and expenses).
Fixed vs. Adjustable Death Benefits ‑ Whole life insurance offers a guaranteed death benefit, which stays the same over the life of the policy. Universal life insurance provides the flexibility to adjust the death benefit amount, provided certain conditions are met.
Cash Value Growth Mechanisms – The way cash value accumulates interest differs between the two policy types. With whole life, cash value typically grows at a guaranteed minimum interest rate, as specified in the policy’s sales illustration and annual statements. In contrast, universal life policies offer different interest crediting options, such as indexed interest tied to a specific market’s performance. It is therefore less predictable and more subject to market fluctuations.

Which Cash Value Insurance is Better for You? Once you decide you want a cash value life insurance policy, the next step is to determine which type is a better fit for you.

Whole life is a better choice when you prefer the stability of fixed premiums, a fixed death benefit and a guaranteed minimum‑interest rate. Universal life might be preferable for you if you want the flexibility of adjustable premiums and a variable death benefit—as well as a selection of cash value crediting options that might potentially generate higher returns.

And of course, term life insurance may be your best choice if you simply want a straight death benefit (no cash value), need the most affordable premium options, or only need coverage for a specific term.

Key Takeaway

Cash value life insurance offers many benefits and comes in multiple forms—so the more informed you are as a consumer, the better choice you can make.

At Pan‑American Life Insurance Group, we offer a spectrum of quality life insurance solutions designed to meet various needs, situations and budgets. Our expert advisors are happy to help you determine the best solution for you.

This article has been prepared for informational purposes only, and is not intended to provide personal or financial advice. You should consult your own professional advisor with respect to your personal situation.

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This article has been prepared for informational purposes only, and is not intended to provide personal or financial advice. You should consult your own financial and tax advisor with respect to your personal situation. Some products may not be available in every jurisdiction where Pan‑American Life is licensed to do business. All products are subject to exclusions and other applicable terms and conditions.