When you think of life insurance, you probably think about protection and peace of mind for your loved ones. Although that’s the primary purpose of life insurance, some types have a cash value savings component that can earn interest over time. Term life insurance does not have a cash value, but permanent life insurance does. Before you settle on either option, you’ll want to understand how a term policy works, what makes term coverage different from cash value life insurance, and the benefits of each.

How does term life insurance work?

When you get term life insurance, your loved ones will receive a financial benefit if you pass away during your policy’s term. You’ll pay annual or monthly premiums in exchange for the peace of mind that loved ones can use the cash payout for any financial needs.

Term life insurance policies are popular choices if you have debts, like a mortgage or college tuition, that will end after a certain point. Thanks to the simplicity of term coverage, you can choose a term length that aligns with your financial situation and only pay for the coverage as long as you need it. However, once the term expires, your coverage ends. Depending on your circumstances, you can opt to extend your existing policy, get a new term policy, or look at securing lifetime coverage with a permanent life insurance policy.

Why doesn’t term life insurance have a cash value?

By design, term life insurance is a flexible, affordable policy option that can get you the coverage you need quickly. Term life insurance doesn’t have a cash value component to remain as affordable and straightforward as possible. Policies with cash value are more complex and costly, and tend to be well-suited for people who need lifetime coverage.

How does cash value life insurance work?

Cash value life insurance has two components: lifelong coverage with a death benefit payout and an investment account that accrues cash value over time. Each time you pay your premium, part of your payment goes toward each. There are three main benefits to a cash value life insurance policy:

• Coverage lasts a lifetime: As long as you pay premiums, you have lifelong coverage. That means your beneficiaries will receive a death benefit no matter what age you pass away.
• The policy accrues cash value : When you pay your premiums, a portion of the payment goes toward funding the policy’s death benefit, but the rest is invested in your cash value account. Depending on the policy type you choose, you’ll have several options to invest the money. Then, your cash value account can earn interest and dividends, growing the balance with each payment.
• You can access cash value while you’re alive : Once you’ve had your policy for a few years and accumulate enough money in your cash value account, you’re free to use it. You may decide to take out a loan, withdraw from the account, or surrender the policy and sacrifice the death benefit to access the full cash value. Before taking out any money, you’ll want to work with your insurer to fully understand the impact on the policy’s death benefit or any tax consequences. Taking out a loan or withdrawing a lump sum could mean less money for your loved ones once you pass away.

Life insurance policies with cash value

Several types of permanent life insurance policies can earn cash value. Two of the most popular options are:

Whole life insurance

Whole life insurance policies have level premiums and death benefits as long as you own the policy. That makes whole life a straightforward financial tool that’s easy to budget for. Other whole life policy options include:

• Final expense life insurance: If you’re an older adult between 50 and 85 concerned about burdening loved ones with your burial or funeral costs, a final expense policy can help cover those end-of-life needs. Final expense insurance offers a maximum coverage amount of $35,000 and is an affordable policy that provides loved ones with money to cover medical bills, funeral costs, credit card debt, or any other expenses you might leave behind.
• Senior whole life insurance: RAPIDecision® Senior Whole Life is another option for seniors aged 50 to 85 who want to secure a lifetime death benefit with a slightly higher maximum coverage than final expense insurance. This policy accumulates cash value. Plus, you don’t need to take a medical exam or plan for changing premiums.

Universal life insurance

Universal life insurance is permanent life insurance that gives you greater payment flexibility by allowing changes to your premium or death benefit. This could be a good option if you anticipate your income or expenses will vary later in life.

For example, say you start a business and have very little income right now. You could scale back how much you’re paying toward your premium today and plan to increase how much you’ll pay later when your income is more stable. Another aspect of universal life insurance is that your cash value grows based on current market rates, so, your cash value can grow quickly when economic times are good, but could face more limited growth during an economic downturn.

Do you need life insurance with a cash value?

Cash value life insurance makes sense in certain situations. For example, if you’re a high earner and need additional tax-deferred savings options, a whole life insurance policy with a cash value account may be a good option. However, since whole life insurance accrues cash value, premiums tend to be much higher than term life insurance, meaning it may not be the best choice for families that need coverage on a smaller budget.

The good news is, in many cases, an affordable term life insurance policy can provide the protection you need at a price you can afford. So start your search for the right life insurance policy today by contacting an agent or getting a quote online .