- 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 the answer to that question, it’s important to understand what life insurance really is and how term life plans are different than permanent plans like whole life insurance.
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 you still have the plan, that coverage amount is paid out to the beneficiaries you named on the policy and 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 there are many different types of plans available to you that work a little differently from each other. The two main categories of life insurance are term life insurance and permanent life insurance.
Term life insurance plans give you coverage for a set period of time (between 10 and 30 years, typically, although Everyday Life is one of the few providers who offers 40 year plan options). When your coverage period is over, you either purchase a new plan or go without. Whole life insurance typically covers you for your whole life, hence its name. As long as you pay your premiums, whenever you pass away they pay out your death benefit to your beneficiaries.
What Is Cash Value?
One of the reasons why some people are interested in whole life plans is because they offer something called a “cash value”. Your insurance company takes a fraction of the premium you are paying and invests it. 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, it’s important to note that it typically takes several years for a policy 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. If you do not repay the loan, that amount will be 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 plans do.
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 of a financial risk by allowing you to withdraw a loan from your policy, these plans are substantially more expensive than simple, temporary 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 be mixing 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|
Value of investing cost savings in a bond fund
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, our company uses a needs assessment tool to help you figure out what coverage you need based on major life events and then build a customized plan that automatically adjusts your coverage and cost over time. There’s no cash value, but our plans could save you thousands of dollars compared to other whole life or term life plans! You can learn more and get a quote here.