What Is a Cash Value Life Insurance Policy?

A cash value life insurance policy provides a benefit upon death, and also accrues a monetary value that can be accessed before a person dies. There are different types of insurance that fall into this category. These are whole life insurance, universal life insurance, and variable life insurance. The common type of coverage known as term life insurance is different, and does not build a cash value.

All types of life insurance are intended to provide a financial benefit upon the death of the insured. This benefit is often paid to the surviving spouse or children of the insurance holder. Basic types of coverage, such as term life insurance, pay a set amount at the time of death. Term coverage cannot be accessed before the owner dies, and can never be used to pay pre-death medical or living expenses.

This disadvantage is eliminated with a cash value life insurance policy. A cash value policy has a monthly premium that is higher than an equivalent term life policy. Part of the premium is applied to the standard benefit that is paid upon death. The remaining portion, however, is placed into a financial account. Money in this account belongs to the policy holder, and can be accessed at any time like an ordinary savings account.

Each time the monthly premium is paid, the cash value of the insurance account grows. Money in this account also earns interest. The amount of extra value earned through interest is often small at first. When a cash value policy is kept for many years, however, the interest on this account can be significant.

Whole life insurance is one type of cash value policy. A whole life insurance policy is intended to be kept for the entirety of a person's life. This is one of the simplest forms of cash value insurance, and usually includes a guaranteed interest rate and a monthly premium that remains continuously constant.

Universal life insurance is a cash value policy that uses the investment amount to partially fund the death payout. This means that if a policy has a set benefit of $1,000,000 US Dollars (USD) and $500,000 USD in the investment account, the insurance providers are required to cover only half of the payout. As an advantage, the required monthly premium will decrease each time the investment portion grows.

Variable life insurance is a cash value life insurance policy that allows the holder to determine choose a preferred investment. Holders of this policy can select from mutual funds, bonds, and other investments. Skilled investors can increase the cash value of their policy through smart selections. Aside from this feature, variable life insurance functions the same as universal life coverage.