- Only permanent policies like whole life and universal life offer cash value, which may make them more attractive (until you understand what that does to the cost of the plan).
- Term life plans don’t offer cash value within the policy, but over time can help you build your savings and invest more wisely than a permanent life policy.
One of the most common questions people have about term life insurance is whether or not it has a cash value. In order to understand term life cash value, you must first understand what life insurance really is, how it works and the difference between term life plans and permanent plans like whole life insurance.
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Term Life vs Whole Life: How It Works
On the surface, the basics of life insurance are easy to understand. You pay a premium each month in exchange for an amount of coverage. If anything happens to you while the plan is active, your policy pays out the coverage amount to the beneficiaries you named on the policy. The money can assist them with costs that they would not have had to pay if nothing had happened to you (funeral expenses, mortgage debt, etc.).
All life insurance plans work like this. But many different types of plans are available, and each works a little differently from the other. The different types of plans can be broken down into two main categories of life insurance: Term life insurance and permanent life insurance.
Term life insurance plans give you coverage for a set period of time, typically between 10 and 30 years. However, Everyday Life is one of the few providers that offer options for a 40-year plan. When your coverage period is over, you either purchase a new plan or go without.
On the other hand, whole life insurance typically covers you for your whole life, hence its name. As long as you pay your premiums, your policy will pay out your death benefit to your beneficiaries whenever you pass away.
What Is Cash Value?
One of the reasons some people are interested in whole life plans is because they offer something called “cash value.” Cash value is when your insurance company takes a fraction of the premium you are paying and invests it for you.
The investments your insurance company has made are designed to make you money: your “cash value.” If you need a large sum of money, perhaps to cover a medical emergency, you can request to borrow some of this cash value from your policy.
However, one of the life insurance basics you need to know is that a policy typically takes several years to build any cash value.
If you repay the cash value loan and the interest on that loan before you pass away, your policy’s full benefits will be paid out to your designated beneficiaries. But, if you do not repay the loan? The amount is subtracted from the coverage value of your policy when it is paid out.
If you pass away and do not use your cash value, most of the time it goes back to the insurance company — not your beneficiaries.
Whole Life Plans Have Cash Value, Do Term Life Plans Have This Too?
The simple answer is no, they do not… at least not the same kind of “cash value” that whole life insurance has.
However, term life plans are extremely valuable in a few other ways — and they can result in you having more cash on hand — precisely because they lack the cash value of whole life plans.
See, because the insurance company is taking on more financial risk by allowing you to withdraw a loan from your policy, these plans are substantially more expensive than simple, term life plans. Whole life plans can cost seven to ten times as much compared to term life plans that offer the exact same amount of coverage.
When you choose a term life plan instead, you’ll see substantial cost savings every month that will really add up over time.
You shouldn’t mix up your insurance and your investments. Life insurance is supposed to protect your family in case something happens to you — that’s it! Buying standalone insurance gives you a much better deal, allows you to save more money that you can then invest, and keeps your goals clear.
Here’s an example of what a 35-year-old healthy woman living in Georgia might pay for a plan with cash value vs without it, and how that cash value compares to just investing the cost savings into a basic government bond fund:
|Product||Coverage period||Coverage amount||Monthly premium||Total premiums paid over 30 years||Pre-tax cash value after 30 years||Pre-tax value of investing cost savings into a bond fund returning 5%|
|Typical whole life policy||Entire life||$500,000||$433||$155,880||$293,730||$0|
|Typical term life policy||30 years||$500,000||$30.91||$11,128||$0||$336,601|
|Predictive ProtectionⓇ from Everyday Life||30 years||$500,000 for first 15 years, stepping down to $250,000 for the last 15 years||$26.62 for first 15 years$19.07 for the last 15 years||$8,224||$0||$342,245|
The Bottom Line
You may have heard the popular advice “buy term and invest the rest”, the rest being that money you save by not purchasing a whole life plan. That’s exactly what we’re talking about.
You can see in the above chart how the cash value of a typical whole life policy compares to what you could earn if you bought a term policy and invested the difference into a conservative government bond fund:
- Whole life cash value: $293,730
- Typical term’s cost savings put into a bond fund: $336,601
- Everyday Life’s cost savings put into a bond fund: $342,245
Everyday Life plans are a unique, dynamic form of term life insurance that can help you save even more. We understand that you don’t need the same amount of coverage at every point in your life. When you have little kids, you’ll need a lot, but when they grow up and go to college, for example, you won’t need as much.
Unlike most term life plans, where the coverage and premiums remain the same for the life of the policy, The Ultimate Life Insurance Calculator helps you figure out what coverage you need based on major life events. You get a customized plan that automatically adjusts your coverage and cost over time.
There’s no term life cash value, but our plans could save you thousands of dollars compared to other whole life or term life plans. Learn more and get a quote today!