Comparing Cash Value Life Insurance vs. Term

In this article...
  • Examine the features and benefits of cash value life insurance vs. term life. Take the mystery out of shopping for insurance by finding out how each type works.

One of the first decisions you need to make when shopping for life insurance is whether term life or a policy with cash value is best for you. To make an informed choice, you need to understand the features, benefits and drawbacks of cash value life insurance vs. term.

Cash Value Life Insurance vs. Term: The Basic Differences 

Term life insurance promises to pay a death benefit if you die during a limited timeframe known as the term, which may last from 1 to 30 years. When the term ends, the policy expires. Some policies do give you the ability to renew, but your premium may go up based on your age and health status.

Cash value life insurance is permanent insurance that remains in effect until you die. A portion of your monthly premium payment goes to fund a cash account.

Is Term or Cash Value Better?

Whether term or cash value life insurance is better for you depends on:

  • Your age
  • Your health
  • Your financial goals
  • Your current income
  • How much life insurance you need

To decide which type to buy, compare their advantages and disadvantages.

Advantages of Term Life

Some reasons to buy term life include:

  • Lower premium payments. Cost is the biggest benefit of term life. In general, the premium payments for term life are much lower than what you'd pay for permanent insurance with the same death benefit.
  • When your life insurance expires, you can buy a new policy. This lets you easily adapt your insurance coverage to changes in your financial situation over time.

Disadvantages of Term Life

Some potential drawbacks of term life include:

  • You don't build up a cash value.
  • Premium payments may increase substantially when you renew or buy a new policy.
  • You may need to undergo a medical exam each time you renew or buy a new term policy.
  • Life insurers may not approve applications for older adults. If your policy expires when you're 70 or older, you may not be able to get more insurance or you could end up paying a very high premium rate.
  • There is no ability to surrender your policy. If you cancel, you lose all premiums paid.

Advantages of Cash Value Insurance

Some key benefits of cash value life insurance include:

  • Coverage lasts until you die, so you won't have to undergo more than one medical exam or worry about coverage.
  • The policy may offer the ability to take cash withdrawals to cover major expenses or pay for long-term care.
  • Cash value life can usually be used as collateral for a policy loan that you don't have to make payments on unless you wish to.
  • Some policies pay annual dividends that usually aren't taxable. To get this benefit, you need to buy participating whole life insurance.
  • The policy can often be surrendered in exchange for a portion of the cash value.

Disadvantages of Cash Value Insurance

Some downsides to cash value life insurance include:

  • Cash value life insurance costs more than term life.
  • Interest rates paid on cash value may be low if you aren't willing to take on some risk.
  • Cash withdrawals and outstanding loan balances can lower death benefit payouts.
  • Cash value may grow slowly.
  • Some types are complex and require knowledge of investing.

Why Is Cash Value Life Insurance Not a Good Investment?

Life insurance agents often tout cash value life as an investment opportunity. While it's true that you will usually earn some interest and have money available to borrow against or withdraw during your life, permanent insurance isn't always a good investment.

Some cash value life insurance like whole life and guaranteed universal life ensure that you make at least a minimum amount of interest. However, the interest rates are usually much lower than what you could earn on another type of investment. Often, the rates don't keep up with the rate of inflation.

To possibly earn a more substantial interest rate, you normally need to choose life insurance that pays based on the performance of financial instruments or indexes. During times of poor performance, you run the risk of not earning any interest. Some types of permanent insurance such as variable life even expose you to the risk of losing your initial investment.

Before buying a cash value life insurance policy, explore other investment options. You may find that taking out a term life policy and opening an IRA or another retirement account is a better fit for your needs.

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