Guaranteed cash value life insurance policies are cash accounts that gradually build over time as part of a permanent life insurance policy.

Permanent life insurance, such as whole life, insures you for an entire lifetime. Once the policy goes into effect, the life insurance company pays a death benefit no matter when you die.

As you pay premiums, a guaranteed life policy’s cash account grows with interest, tax-deferred, as a sort of enforced savings account. Guaranteed cash value policies can help you pay for emergencies or temporary needs. 

Once the cash value account has reached a certain level, you can use it to pay premiums. At that point, the policy is known as being “paid up.” You have to resume paying premiums, though, if you withdraw some of the cash from the account.

You can also borrow against cash value at an interest rate that is typically lower than what you could get at a bank. You don’t have to repay the loan. That said, if you don’t repay the money, your survivors will get a lower death benefit when you die. 

The cash account is one reason premiums are higher for permanent life insurance than for term life. Term life insures someone for a certain period, such as 10, 20 or 30 years.

The policy pays out if the person dies in that time span. Which life insurance policy is best for you depends on what you want out of the policy. 

Term life is a good choice for someone who wants to cover mortgage payments and other living expenses, as well as college tuition for their children, but doesn’t see a need for life insurance once the house is paid off and the kids are grown up. Term life doesn’t have an accompanying cash value account, so you can’t tap into the policy later. 

Whole life is a good choice if you want the savings option that the cash value provides. It also makes sense if you want to provide for your heirs no matter when you die or you have a large estate to protect. The heirs could use the death benefit to pay estate taxes.

For more, see life insurance basics and cash value in life insurance: what’s it worth to you?


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