Help Desk FAQ

Life insurance


What is cash-value life insurance?

Cash-value policies—also known as whole life policies—provide a death benefit and a savings account. Insurance salespeople often highlight the "forced savings" aspect of cash-value insurance. Part of your premiums go into a reserve fund—or accumulation fund—that builds up over the years your policy is in effect. If you drop the coverage, you get back the cash surrender value—the value of the reserve fund minus the amount you are paying for the life insurance death benefit (mortality charge), commissions, administrative expenses, fees and charges. You can also borrow against the cash-value of your policy.

There are just a few basic types of cash-value policies, but insurers offer hundreds of variations under different names. Ask your agent or insurer if it is a term or cash-value policy. If it is cash-value, ask which of the following it is:

  • Whole life: The premiums are usually fixed for as long as you pay them regularly. Most whole life policies pay you income in the form of dividends. These payments vary depending on how the company invests the money, its expenses, the death benefits it pays and your own policy's terms. There is always a minimum earnings guarantee—income you will receive in the form of periodic dividends. You do not owe income taxes on this income until you withdraw it.
  • Universal life: These policies give you more choices than whole life. You can decide how often and how much of a premium to pay. However, there is always a minimum payment due. The less you pay, the smaller your cash-value and death benefit will be. Premiums go into an accumulation fund which pays interest. Some universal life policies pay only death benefits; other, more expensive policies, also increase in cash-value.
  • Variable life: You can invest the reserve fund in stocks, bonds or money market funds offered by the insurance company. These policies earn variable returns and almost never pay dividends. Look for a feature that guarantees a minimum cash-value.

Term life insurance provides only a death benefit for as long as the policy is in effect. Because there is no savings component, premiums are much lower. Many experts favor term life insurance and encourage consumers to use the premium savings to invest on their own.

Learn more at the Insurance Information Institute website and the NerdWallet website.





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