There are two types of life insurance: permanent life and term life. The best life insurance policy for you depends on your budget as well as your financial goals.
Term life insurance has a death benefit that’s paid out to your beneficiaries after you die, but it only lasts for a specific period of time. Permanent life insurance never expires and has a cash value component in addition to the death benefit. Due to the cash value feature, permanent life insurance is considerably more expensive.
Does term life insurance have a cash value?
Term life insurance does not have a cash value, unless you purchase an optional rider called return of premium, which has a cash value feature.
Term life insurance covers a 10-, 20-, or 30-year period. If you die during that period, your beneficiaries get your payout, known as the death benefit. Term life insurance is generally recommended for any adult with a dependent, because of the low monthly payments and death benefit.
Permanent life insurance has a death benefit for your beneficiaries and a cash value that you can use during your lifetime. But again, the premiums are more expensive than term life policies.
‘Return of premium’ riders may have cash value options
While term life insurance does not have cash value, return of premium, also referred to as ROP, is an optional add-on rider that does have a cash value. A “return of premium” rider returns part or all of the money you’ve paid on insurance premiums if you haven’t used the policy once your term ends.
Some return of premium riders offer cash value as an add-on feature — this varies by insurance provider. State Farm says its ROP offers cash value that you can borrow during the term, but any unpaid balances decrease the death benefit. In this way, return of premium riders mimic some of the benefits of a permanent life insurance policy.
If you want a policy that doesn’t expire, accumulates cash value, and has a death benefit that you can increase over time, a permanent life insurance policy may be what you’re looking for.
Permanent life insurance has a cash value
Cash value is a unique feature to permanent life insurance policies. All permanent life insurance policies have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value — in the insurance company’s portfolio, stock market, or annuities.
The initial years of a permanent life insurance policy are expensive compared to what you’ll pay in the future. “In the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you’re older,” said Mark Williams, CEO of Brokers International.
| Type of permanent life insurance | Best for | Where is money invested? |
| Whole life | Guaranteeing exact same premium for the life of the policy | In your insurance company’s portfolio |
| Universal life | The flexibility to change your premium, death benefit, and cash value over time | In your insurance company’s portfolio |
| Guaranteed Universal | Flexibility of a universal life policy with guaranteed rates of whole life | In your insurance company’s portfolio |
| Indexed Universal | Like universal life instead of interest rates in fixed indexed market | Fixed index stocks and options |
| Variable life | Investing your cash value in the stock market rather than your insurance company | Stock market |
| Variable universal life | The flexibility to change your death benefit, investing in the stock market rather than your insurance company | Stock market |
You can use the cash value of permanent life insurance during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.
It’s wise to consult an accountant and financial advisor to determine which policy fits your financial needs and goals. It’s worth taking the time to find the best policy for you, because once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.