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Cash value life insurance is permanent life insurance coverage that includes a savings-like component called cash value. Policies built to grow cash value use part of the premium to build a cash reserve that can be accessed during the life of the policyholder. But what types of insurance have cash value? Does whole life insurance have cash value? This article will explain how to maximize your whole life insurance with cash value.
There are a few different kinds of life insurance that have cash value including:
While all these types of life insurance claim the benefits of cash value, whole life insurance is the only permanent life insurance product that builds equity through the policy design. All other permanent cash value life insurance policies are built with a renewable term insurance component, so they cannot ever build equity through the life insurance component. The cost of insurance will keep rising and the policy will never be paid up (think paid off) but will merely be leased on a renewable basis. Whole life insurance cash value continues to build throughout your life, which is a living benefit of the policy you can use while you’re alive.
If whole life insurance is new to you, you may want to read more about how it works here.
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Your premium amount is the most obvious factor since every benefit of your policy will be in direct relation to your premium amount. Policy size is the biggest factor that will affect your premium amount, but there are also policy riders that can affect premium amounts as well as cash value growth. The most critical rider for early policy cash value is the paid-up additions rider (PUA). The more premium monies that can be directed to a PUA rider, the larger the policy cash value will be. But as with all good things, too much PUA rider can be a bad thing and trigger unnecessary taxes. It is important to balance the amount of a PUA rider to have the most cash value without any negative tax consequences.
The more premium payments you make, the fraction of your death benefit that is cash value increases. Life insurance not only aids in wealth accumulation during your lifetime via possible growth in cash value but also contributes to creating generational wealth after your passing through the death benefit. Upon your passing, the insurer will directly transfer the death benefit proceeds to the designated beneficiary or beneficiaries, bypassing the probate process. Typically, this benefit is exempt from income tax. However, it’s important to note that the proceeds from the death benefit might be liable to state and federal estate or inheritance taxes.
If your policy pays dividends, how you opt to use your dividends can also make a significant difference in how your cash value grows. Choosing to have your dividends buy paid-up additions (PUAs) is the best way to accrue the most cash value.
We discuss this more below, but the riders you choose to add to your policy can significantly increase how much cash value you gain and the rate of that gain.
This might sound like an odd factor when discussing whole life insurance. However, even though you are covered for your entire lifetime, there are ways to set up your policy so that you aren’t paying premiums your entire life, such as a paid-up policy or a reduced paid-up option. These options can also affect how your cash value builds.
With whole life insurance, there are three common ways you’re able to use your cash value during your lifetime:
The best way to use the cash value in your whole life insurance policy is through a policy loan. Here’s a look at the three options and why a policy loan is often the best solution.
Many policy owners will leverage the cash value in their whole life insurance policy through a loan. This policy loan is an interest only loan which means the principal does not need to be paid back on a specific schedule, as long as the loan interest is paid.
A policy loan does not directly change the cash value and death benefit of a policy since the money comes from the general fund of the insurance company. This allows the policy to continue growing without changing the “compounding effect”. Taking withdrawals or paying premiums from policy values, does directly and permanently affect policy values along with future policy growth.
Loan interest rates may vary from company to company and can increase or decrease per year according to the provisions specified within a policy contract. Policy loans can be used to help cover college expenses, new business expenses, mortgages, caring for aging family members, and more.
You can also take a tax-free withdrawal from your whole life insurance policy; however, this will reduce the death benefit of the policy. Additionally, the withdrawal has to be within the total amount you’ve paid in premiums (cost basis) or else the withdrawal amount above cost basis will be taxed as income.
If you’re having a hard time paying your premiums, you can also use your cash value to help cover those costs. Ideally, your policy would have been designed from the beginning with a premium that you’re comfortable with, but there are options to consider before forfeiting your policy.
Insurance riders, allow the policy owner to add additional options to the policy or even different types of insurance coverage. A life insurance agent can design a whole life policy with a paid-up insurance rider and possibly a term insurance rider so the policy will build cash value much faster than if the owner simply paid the base insurance premium. Using these riders can prove quite beneficial as a long-term financial tool because of the favorable tax treatment life insurance proceeds, withdrawals, and policy loans receive under Internal Revenue Code 7702.
Care needs to be exercised when using these riders because in most cases, the policy owner will want to avoid any tax ramifications that could result from adding these riders to a whole life policy. Even though cash values can accumulate quickly with certain riders, it may not always be in the policy owner’s best interest to have these riders, depending on how the policy owner intends to use their future cash values.
Funding whole life insurance policies with the maximum amount that is affordable and comfortable is a good financial decision for many people. It is also possible to pay extra premiums into an established whole life policy to increase cash value. Following the guidelines is important when adding additional premium monies so that the policy proceeds will not lose their tax-preferred treatment.
Tools of the Trade - How to Use the Cash Value in Your Life Insurance A quick reference guide on how policy loans work, how to make loan repayments and how to track your loans.
Here is an example of a basic participating whole life insurance policy, without riders, a base death benefit of 1,064,553, and a yearly premium of $10,000, for a 30-year-old man.
| Year (age) | Total Premium + Riders | Cash Value | Death Benefit |
| 1 (31) | 10,000 | 106 | 1.064,553 |
| 10 (40) | 100,000 | 85,881 | 1,073,109 |
| 20 (50) | 200,000 | 235,869 | 1,152,605 |
| 30 (60) | 300,000 | 459,976 | 1,268,247 |
| 40 (70) | 400,000 | 790,577 | 1,432,456 |
| 45 (75) | 450,000 | 1,011,550 | 1,543,551 |
| 50 (80) | 450,000 | 1,230,912 | 1,682,840 |
| 60 (90) | 450,000 | 1,797,295 | 2,087,887 |
You’ll notice that at age 75 he stops paying premiums and his death benefit and cash value continue to grow. You can also notice the rate and amount of his cash value growth.
Whole life insurance allows someone, over time, to own more and more of their own death benefit! Instead of the insurance company merely promising to pay a death benefit, the owner of the policy actually develops equity or ownership in the policy they purchase. This ownership or insurance owned by the policy owner is called paid-up insurance and is only available with whole life insurance.
Paid-up insurance is a specific amount of death benefit that a policy owner has paid for entirely. There will never be another premium charged for that piece of insurance again! In other words, paid-up insurance is equity owned by the policy owner. Paid-up insurance can be favorably compared to the equity that someone develops while purchasing real estate or any other asset. Consequently, as with any other asset where equity develops, the policy owner can leverage that equity (money) on demand.
Whole life insurance is also a powerful estate planning tool. It lets any policy owner pass money on to a person, corporation, or charity, tax-free in many cases, even if the policy has been overfunded and lost its tax-preferred treatment under IRC 7702.
In addition to the other benefits, any cash value of whole life insurance accrued over the lifetime of a policy is tax-deferred. This allows greater benefit and flexibility for the policy owner over their lifetime. Money accessed via a loan against the cash value of a whole life insurance policy can be kept tax-free if the policy owner knows how to manage their policy correctly. Cash withdrawn is tax-free up to but not exceeding policy cost-basis. Borrowing money against your policy tax-free and without penalties can be of tremendous benefit in many situations. Here are some examples about how to use cash value and information that is useful to know about whole life insurance cash value.
When a premium is fixed, the premium cannot increase over the lifetime of the insured. This creates a significant advantage for those who purchase whole life insurance. Once the cash values rise to the point of being greater than the premiums paid for the policy, the policy owner can easily determine the value of keeping the policy by seeing how each annual cash value increase is compared to the annual premium. This return on premiums paid can become huge over the lifetime of a good whole life insurance contract.
Any life insurance policy design should be based on the purpose for which the policy is intended to be used. Designing the policy for its intended purpose will dictate what riders are necessary and which riders are not necessary.
All life insurance riders have a cost, you either pay upfront or when the options provided by the rider are exercised.
As a life insurance buyer, you should never feel compelled to purchase any life insurance policy until you fully understand why and how it was designed to benefit your needs. If you don’t fully understand, don’t buy yet. If the agent you are working with can’t help you understand or give you clear explanations, find someone who can.
If you are not completely confident about a life insurance proposal you’ve been given, or you are having difficulty evaluating an insurance policy you already own, we recommend getting an independent insurance review. This helps you be sure of the insurance you own and have financial peace of mind. If you need an independent life insurance review, you are welcome to use our review service, just request a review here.
Your goal should be to pay a premium that is comfortable and affordable for you. And most importantly, you want to make sure that what you are expecting from your policy will be there for you in the future.
At McFie Insurance, we specialize in designing whole life insurance policies that maximize cash value and meet the needs of people who want to grow their wealth. We believe everyone deserves the chance to be wealthy and have financial peace of mind.
If you have questions about a policy or need a policy designed for you, please schedule a strategy session with us or give us a call directly at 702-660-7000. It would be our pleasure to help you.
Dr. Tomas P. McFie
Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.
