How Cash Value Life Insurance Differs From Term Life Insurance

Shopping for life insurance can get complicated. There is whole life, term life and many sub-types of policies underneath each respective type. One of these sub-types is what is called a cash value life insurance policy, falling under the whole or permanent life insurance category.

A cash value life policy is a different type of policy than a term life policy. Term life is designed specifically to meet goals that would expire after a number of years, while a cash value life insurance is a form of permanent life which does not expire as long as the premiums are kept up to date.

Permanent life insurance carries a face value and a cash value. The face value is the original amount of the policy, such as $100,000. The cash value is that amount plus any interest the policy has earned. Cash value fills a special role in whole life by providing the policy owner with a financial tool: A savings account that can be borrowed from without credit checks or collateral.

Term life policies are typically written for 5, 10, and 20 years. When the term is reached, the policy either expires, or must be converted or extended. Converting a term policy to a permanent policy creates a cash value that the original term policy did not have. Term life insurance is meant to meet life goals for your family, such as paying off the mortgage or even providing the funds for your children to attend college after high school. Determining if this is the right policy for you really depends on your overall goals and time frames for being insured.

Permanent life is more expensive than a term life policy, largely due to the cash value of the policy. Since the accrued cash is in turn used as an investment by the life insurance company, a policy which carries a long term yield creates overhead related to investments and maintenance on the account. In short, permanent insurance costs more because it does more for the individual and their family. Term life has a higher profit margin for the insurance company, because they are betting that you will live for a number of years, not trying to guess how many years there will be.

To get a better idea about what policy is right for you, you should compare quotes from several different companies and speak with a qualified insurance agent that can help you through the process.