When choosing a life insurance policy, you have two basic options: term and permanent.
Term insurance is temporary: Your policy lasts for a set period, during which you pay premiums. If you die while your policy is active, your beneficiaries receive a “death benefit” (the face value on the policy). That money can be used to cover the costs of the funeral, living expenses, outstanding debts and more. However, if you outlive2 your policy or cancel it, your insurance coverage ends, and you don’t receive any refund or payout.
Permanent insurance lasts for your lifetime (as long as you keep making the payments). It’s also known as cash value insurance because the policy can also be used as a type of savings or investment vehicle. This allows you to accumulate value over time—tax deferred—and draw on those funds while you’re still alive.
Cash value insurance might sound more appealing on the surface, but it comes with a trade-off: The policies are more expensive than term insurance. Before you opt for cash value insurance, it’s important to weigh the benefits and drawbacks. It may turn out that term insurance makes more sense for you and your family.
What is cash value life insurance?
Cash value life insurance is a type of permanent life insurance that also has an investment component. Over time, the policy accumulates value, which you can use to pay your premiums, borrow against1 or cash out to cover an emergency.
How cash value life insurance works
There are two components to permanent life insurance: the death benefit and the cash value.
The death benefit is considered the “face value” of your insurance policy. It’s the amount of insurance you purchased, which your beneficiaries stand to receive if you die.
The cash value side refers to the additional funds available to you while your policy is active. This portion of your policy accumulates tax-deferred interest. How it earns that interest depends on what type of policy you choose.
How cash value accumulates
As you make life insurance payments, one portion of the funds goes toward paying your policy, including administrative fees. The other is set aside in an investment account. Usually, more of your payment gets allocated to your insurance plan over time, since it becomes costlier to insure you as you age. That means cash accumulates quickly during the early years of your policy, then slows down over time.
The exact way that cash value accumulates depends on the type of insurance you have.
- Whole life: The cash value is guaranteed and grows according to the particular insurance company’s own formula.
- Universal: The value grows according to current interest rates.
- Indexed universal: The account is tied to a market index, such as the S&P 500®, and value grows according to the performance of that index.
- Variable: This type of insurance invests funds into sub-accounts that are similar to mutual funds. The cash value grows according to the sub-accounts' performance.
There are several ways you can use the cash built up in your insurance policy.
The first is to pay your premium. Once your account builds up enough value, you can withdraw funds to make your payments. It’s important to keep an eye on the balance, though, because dropping too low can cause your coverage to lapse. Usually, variable and universal life policies offer this option.
If you experience a financial emergency, have significant medical expenses or want to make a big-ticket purchase, you can take out a loan against your accumulated cash value. The benefit is that you won’t have to go through a credit check or other underwriting requirements. The loan can remain outstanding for as long as you want, and it won’t show up on your credit reports.
The downside is that if you die with an unpaid balance on the loan, that amount will be deducted from your beneficiary’s payout. Plus, unless you make interest payments, interest will be added to the outstanding balance. And if the loan balance ever exceeds your policy’s cash value, your coverage will be canceled, and you could end up owing income taxes on the loan.
Alternatively, you can surrender your policy and take the cash. Keep in mind that fees and surrender charges will be taken out, making the amount you receive less than the actual cash value. (If you don’t want to give up your policy, you can make a partial withdrawal, which will lower the death benefit.)
Does term life insurance have a cash value?
The idea of growing some savings while paying for life insurance probably sounds like a great option. The downside is that permanent life insurance policies tend to be expensive. So, you might wonder whether more affordable term life insurance also has a cash value.
The bad news is that term life insurance has no cash value. When your policy ends, you don’t receive any money. On the bright side, it’s less expensive than permanent insurance. Due to the savings on premiums, you may end up ahead financially with term coverage despite the lack of a cash value.
Why term life doesn’t have a cash value
Term insurance is meant to be a straightforward option that covers you during certain periods of your life. For instance, you might want term coverage when you have outstanding debt like a mortgage or student loans. It’s also a good idea to have if you have financial dependents.
Do Prudential life insurance policies have a cash value?
Here’s a breakdown of policies Prudential offers and which have potential cash value.
- Term. Prudential’s term insurance option is great for those looking for simplicity and low cost. However, it does not have a cash value.
- Universal. If you’re looking for long-term life insurance with the flexibility to adjust the amount of your coverage, a Prudential universal life policy may be a good option. This type of insurance does offer potential cash value.
- Indexed universal. For a cash value that could grow along with the U.S. stock market, consider Prudential’s indexed universal life insurance. These policies track the performance of the S&P 500 index of the nation's 500 largest company stocks.
- Variable universal. If you’re willing to take on more risk in order to seek higher returns, consider a variable universal life insurance policy. These plans enable you to manage your policy’s underlying investment options.
Footnote
1 Outstanding loans and withdrawals will reduce policy cash values and the death benefit and may have tax consequences.
2 You may be able to extend term insurance (depending on the policy), but the cost will be based on your age and health at the time you make the move.
Written by Casey Bond
Casey Bond is a personal finance writer and editor, as well as a Certified Personal Finance Counselor. Her work has appeared on HuffPost, Business Insider, Yahoo Finance, MSN, Forbes, The Motley Fool, U.S. News & World Report, TheStreet and more.
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