Cash Value Life Insurance – How Does it Work, and Who is it For?

Cash value life insurance plans offer protection and wealth accumulation rolled into one, but unlocking their full potential requires a steady approach. Here’s everything you need to know about cash value life insurance.  

The term ‘cash value life insurance’ refers to a class of life insurance policies that offer both insurance protection and a cash value component that builds up over time, akin to a savings or investment account. 

Cash value life insurance policies are permanent - they last throughout the duration of your lifespan without requiring renewals, provided that all premiums due are paid on time. As with other insurance policies, when the benefits are triggered, the policy pays out and terminates afterwards.. 

Some examples of cash value life insurance policies are:

• Whole life insurance - Also known as traditional life insurance, whole life insurance plans are perhaps the most common and widespread example of cash value life insurance. 
• Variable life insurance - A permanent life insurance policy that contains various accounts used to invest in different types of investment products, such as bonds, stocks and funds. In Singapore, Investment-linked Policies (ILPs) are the closest example of variable life insurance you can find.
• Universal life insurance - A permanent life insurance policy often marketed as a tool for leaving a substantial inheritance to surviving loved ones. Universal life policies require high single-premium payments to purchase, although some insurers may offer loans to selected prospects. 

How does cash value life insurance work?

Cash value life insurance works by allocating the premiums you pay to two buckets. 

Funds in the first bucket are used to cover the cost of providing insurance protection to you.

The portion of your premiums that go into the second bucket is invested on your behalf, or saved up in an interest-bearing account, depending on the type of cash value life insurance plan you have. This forms the ‘cash value’ portion. 

Over time, the cash value of the policy increases through a combination of premium payments, investment yield, interest earned and/or declared bonuses. Do note that different types of cash value life insurance plans increase their cash values in different ways.

When the payout is triggered, you may receive the sum assured, the cash value, or some combination of the two. This, again, differs according to the specific type of policy you have. 

Because a permanent insurance policy has a cash value, if desired, you may take out a loan against your policy to meet other financial obligations.

However, you’ll need to ensure your policy retains sufficient value to pay for the cost of insurance, interest charged on the loan, and other fees that may arise. 

Otherwise, your policy will lapse, which will leave you without protection, and may even result in a financial loss. 

When taking a policy loan, make sure to find out the maximum amount you can withdraw, the interest charged on the loan, and what repayments you need to make – if any – in order to keep your policy in force. 

This is important because should the value of your policy fall below a certain threshold, your plan will lapse and the remaining funds will be paid out to you. This will leave you bereft of insurance coverage and potentially a loss of premiums paid.

It is a good idea to have a plan to pay back your policy loan (or at least the interest owed) so your policy does not fall below the danger level.

What are the pros and cons of cash value life insurance?

Is cash value life insurance right for you?

The main draw of cash value life insurance lies in the combination of protection and wealth accumulation. This is undoubtedly a convenient and attractive solution for those seeking a way to meet both those needs in a unified manner. 

Typically, the premiums for cash value insurance remain fixed, so there’s no need to set aside more of your budget as you get older. This makes it easy to plan your cashflow. 

In addition, the different types of cash value insurance plans available increase the likelihood of finding one that is right for you. 

For instance, there is a new format of ILPs known as investment-focused ILPs. These work differently from older generation ones in that your premiums are wholly invested, with your insurance coverage growing as your account value goes up. 

Such plans may be a more suitable option for those who are more focused on investment returns rather than insurance coverage.

Having a cash value component also extends a living benefit, giving you the choice to access your money while still alive, instead of purely benefitting the loved ones left behind, as would be the case with, say, a term life policy. This offers some degree of flexibility over other types of life insurance. 

On the flip side, cash value life insurance is costly, and individuals who have tighter budgets may find such plans unaffordable, or may have to settle for a lower death benefit than desired. Although, do note that most insurers allow you to adjust your death benefit if desired later down the line.

Another consideration is that cash value life insurance requires patience. The cash value of the policy tends to build slowly, and you may have to wait a long period before your policy breaks even. For ILPs, this also applies to your insurance coverage – you’ll likely need a substantial amount of time for your benefit to reach the level you desire. 

For cash value policies that offer fixed sums assured from the start, your initial premiums are used to pay for the cost of insurance and other applicable costs, leaving only a small portion as cash value. 

As a result, surrendering such plans early will likely cause you to to suffer a financial loss. Hence, if you start on a cash value policy, you’ll need to stay the course, at least until you hit the policy breakeven point – which is likely to be quite a few years away.

But, once the policy’s cash value is high enough, you may be able to use it to pay your premiums and maintain your policy without further premiums. 

Cash value life insurance can be rewarding, but requires a lengthy commitment in order to unlock its full potential.

Before you sign up for one, be sure to consider carefully how well it fits into your financial goals and objectives. 

When in doubt, always consult a licensed professional or certified financial advisor for advice. 

Protected up to specified limits by SDIC. 

Note: This is only product information provided. You may wish to seek advice from a qualified adviser before buying the product. If you choose not to seek advice from a qualified adviser, you should consider whether the product is suitable for you. Buying an insurance product that is not suitable for you may impact your ability to finance your future healthcare needs.

If you decide that the policy is not suitable after purchasing the policy, you may terminate the policy in accordance with the free-look provision, if any, and the insurer may recover from you any expense incurred by the insurer in underwriting the policy.

As buying a life insurance policy is a long-term commitment, an early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. You should seek advice from a financial adviser before deciding to purchase the policy. If you choose not to seek advice, you should consider if the policy is suitable for you.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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