How Does Cash Value Life Insurance Work?

In addition to providing a death benefit, cash value life insurance builds up cash—similar to a savings account—which the policy owner can access on a tax-advantaged basis, thus providing living benefits. This article explains how cash value life insurance works.

You’ll soon have a basic understanding that can help you decide if cash value life insurance is right for you. We’ll also reveal a little-known type of cash value life insurance often called high value life insurance or high early cash value life insurance. Here’s a link to a free valuable 20-page illustrated special report with more information.

What Is Cash Value Life Insurance?

Investopedia explains cash value life insurance this way: Cash value life insurance does far more than pay out a death benefit to your beneficiaries when you die. It also accumulates real value you can access and use during your lifetime.

You can use the cash value as a tax-sheltered growth account that you can borrow from (the annual growth of the policy is tax-deferred), as a source of money to pay the life insurance policy premiums later in life, and to provide income in retirement.

With each premium payment you make on a cash value life insurance policy, part of the money pays for the policy’s death benefit.

Another part of your premium covers the insurance company’s operating costs and reserves. If you’re not using one of the dividend-paying whole life policies preferred by Bank On Yourself Authorized Advisors, part of your premium goes to stockholders as their profit. (On the other hand, policies from companies preferred by Bank On Yourself Authorized Advisors pay their profits back to the policy owners, in the form of dividends.) All the rest goes toward building your policy’s cash value.

As you continue to pay premiums on the policy, your cash value grows more efficiently every year, according to a formula that is pre-set by the insurance company before you purchase your policy. The cash value can grow in other ways, too.

Learn more in this article from our Consumer-Friendly Guide to Life Insurance: Is Whole Life Insurance a Good Investment?

Three Types of Cash Value Life Insurance

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Whole life, universal life, and variable life (and combinations of the three) are all types of cash value life insurance. We explain these three types of life insurance—and term life insurance, too—in more depth in this section of the No-Nonsense Life Insurance Guide. Here’s a short summary of each type:

Whole life insurance

Whole life policies accumulate cash value based on a formula predetermined by the insurance company. Once the policy is issued, the formula is guaranteed not to change.
Because of that guarantee, the cash value of a whole life policy will grow by a predictable and guaranteed amount each year, unless the policy owner does something to change it, such as surrendering the policy.

Universal and indexed universal life insurance

Regular universal life policies accumulate cash value based on current interest rates. Note the word “current.” What was current when the policy was issued may not be current several years later. There are no cash value guarantees unless you purchase, for an additional cost, a special “rider” that provides a guarantee.

Indexed universal life policies, also known as equity indexed universal life policies, accumulate cash value based on the performance of the stock market or some portion of it, as measured by a particular index such as the S&P 500 Index. (Please review 7 Reasons to Be Wary of Indexed Universal Life Insurance.)

Variable life insurance

Variable life policies promise you the possibility of accumulating cash value, based on allocating portions of your premium dollars to various instruments and investment funds within the insurance company’s portfolio such as stocks, bonds, equity funds, money market funds and bond funds. Because of the risks entailed in investing in the market, variable policies are considered securities contracts and are regulated under the federal securities laws.

The Cash Value Life Insurance Policy Type with the Most Guarantees

Of the three types of cash value life insurance (whole life insurance, universal life insurance, and variable life insurance), only whole life insurance can guarantee level premiums for life, costs that will never increase, and cash value that will increase each year.

Learn more about the advantages and disadvantages of whole life insurance and learn how universal life stacks up to whole life insurance.

With cash value life insurance policies and high cash value life insurance policies, the insurance company guarantees your cash value will grow each year—and grow more efficiently each year.

This short article compares buying permanent cash value insurance with buying term insurance and investing the difference.

High Value Life Insurance

Traditional term life insurance has one purpose only: to provide a death benefit if the insured dies during the term of the policy.

But cash value life insurance, and particularly high cash value life insurance has an additional purpose: to provide a place to store cash and grow wealth. With cash value life insurance, you have …

  • No government restrictions on how many policies you can own
  • No government restrictions how much money you can place in your policies
  • No government restrictions or requirements on accessing your money
  • Tax advantages far beyond a typical retirement plan’s tax deferral—which is merely the “privilege” of paying your taxes later, at a rate that could be much higher than if you paid them now

Simply put, high value life insurance is the single most powerful legal tax strategy in the U.S.

What turns a cash value life insurance policy into a high cash value life insurance policy?

It’s all in how the policy is designed. Bank On Yourself-type life insurance policies are designed to grow more cash—faster—than typical run-of-the-mill cash value policies.

Follow that link to see exactly how starting with a base policy, adding a paid-up additions rider (PUAR), and a term rider—all in just the right proportions for perfect balance—maximizes the growth of your cash value without increasing your premium.

While life insurance is always about the death benefit, the living benefits of cash value life insurance policies are extremely important and should not be overlooked. These living benefits

  • Give you the ability to grow your money tax-deferred
  • Allow you to access your money income tax free
  • Provide your loved ones and favorite charities with an income tax-free legacy
  • Offer freedom from government regulation and oversight

This four-minute video reveals how to use high cash value life insurance policies to turn your cash value into your own private “bank,” allowing you to Bank On Yourself. When you Bank On Yourself, you can use your own stash of cash to …

  • Finance major purchases and stop relying on banks and finance institutions
  • Pay for college for your children
  • Even give yourself tax-free retirement income

If you want life insurance strictly for the death benefit and nothing else, buy a cheap term policy that gives you only a death benefit. And be prepared to pay higher and still-higher premiums at every renewal.

High early cash value life insurance policies give you living benefits

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But if a life insurance policy’s living benefits appeal to you, consider getting a high early cash value life insurance policy, and then treat your policy the same way you’d treat a hard-working, high-interest savings account: put in as much cash as you can, right up to the legal limit. And if you want to contribute more, simply get another policy.

(Because the tax advantages of high cash value life insurance policies are enormous, the IRS has regulations in place to ensure you aren’t focusing only on the tax advantages, but are also purchasing a minimum amount of life insurance protection as you grow your cash value. But there is no legal limit to the number of high cash value life insurance policies you can own.)

Life insurance policies that are “funded to the max” are policies constructed to grow your cash value to the greatest extent possible without running afoul of the regulations—which could cause you to lose your tax advantages.

Find a life insurance advisor with specialized training who understands this wealth-building strategy and will structure a high early cash value policy for you.

Why don’t most life insurance agents automatically design whole life policies for high cash value?

The short answer is: It takes money out of their pockets!

Bank On Yourself Authorized Advisors typically design policies with paid-up additions riders, as one way to boost the policy’s cash value growth.

The problem for the advisor is that well over 90% of every paid-up additions rider premium dollar goes directly to building cash value. Very little goes to the cost of the death benefit, and only a minuscule amount goes to the advisor as a commission.

An advisor who wants to help you build your cash value by adding a significant paid-up additions rider must be willing to take a huge cut in commissions. Most advisors aren’t willing to give up 50% to 70% of their commission income.

The goal of Bank On Yourself Authorized Advisors is to make a reasonable living by sharing the benefits of Bank On Yourself-style high early cash value life insurance with as many people as possible. They are on a mission!

Get the Details You Need About High Cash Value Life Insurance

For these special high early cash value life insurance policies, Bank On Yourself Authorized Advisors recommend only whole life insurance—purchased from one of only a handful of companies that have a strong history of paying dividends year in and year out for more than a century—and that offer non-direct recognition life insurance policies.

Then these specially-trained advisors sweeten the deal by using little-known riders (add-ons) to grow your cash value faster. All of these techniques for designing high early cash value life insurance policies are described here.

When all of these pieces of the puzzle are put together properly—in the proper proportions—you’ll have a high early cash value life insurance policy that provides both a death benefit and high cash value for living benefits.

You can download a free Safe Wealth-Building Report here that reveals how this little-known type of high early cash value, low commission whole life insurance policy lets you fire your banker, bypass Wall Street, and take control of your own financial future.

As a special bonus, Pamela Yellen will also send you, at absolutely no cost, a chapter from her New York Times best-selling book on this subject, The Bank On Yourself Revolution.

If you’re ready to discover what a Bank On Yourself-type high early cash value life insurance policy could do for you and those you care about, you should request a referral to a Bank On Yourself Authorized Advisor, and get a free personalized Analysis, so you can decide for yourself if Bank On Yourself makes sense for you.

Continue to the Table of Contents for the No-Nonsense Life Insurance Guide