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What Is Cash Value Life Insurance and How Does It Work?

Life insurance provides a death benefit for the policy’s beneficiaries. Life insurance policies come in a number of forms, including cash value life insurance which provides permanent coverage with a savings component.

What Is Cash Value Life Insurance?
Cash value life insurance is a form of permanent life insurance that contains a cash value savings component. The cash value is used in a number of ways by the policy holder. These include taking a loan against the policy’s cash value, withdrawing it or using it to reduce the policy’s premiums.

This differs from term insurance where the policy holder is buying pure insurance coverage in the form of a death benefit only. Term insurance is not permanent insurance, coverage runs for a set term such as 10, 20 or 30 years.

How Does Cash Value Life Insurance Work?
A portion of each premium payment goes towards the cost of the insurance coverage and a portion goes into an investment account. The money diverted the investment account earns interest, or investment income in the case of some types of cash value policies, building cash value inside of the policy over time. With some policies, some or all of the cash value can be used to purchase an additional death benefit as a paid-up addition.

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