While the primary purpose of life insurance is to protect loved ones with a death benefit payout if you pass away, some policies can also accrue cash value. However, few policies generate immediate cash value. Unless you’re paying a single premium to obtain life insurance, the cash value will build over time, meaning it could be several years until you’ll have sufficient cash value to remove from the policy as a loan or withdrawal.

Here’s what you need to know about cash value life insurance, how cash value accumulates, and alternatives to consider.

Which types of life insurance generate cash value?

There are a variety of permanent life insurance policies that generate cash value:

• Whole life insurance
• Universal life insurance
• Variable life insurance
• Indexed life insurance
• Variable universal life insurance

However, the two that most buyers of permanent life insurance gravitate towards are whole life and universal life insurance.

Whole life insurance

When you pay your whole life premium, a portion of the premium pays for the policy’s death benefit, a portion pays for policy expenses, and a portion goes toward the policy’s cash value, which is a savings component that increases in value with each premium payment.

For example, if you buy a $100,000 whole life insurance policy and pay a $100 monthly premium, a portion of that premium goes to the $100,000 death benefit, some pays for policy expenses and fees, and the rest goes towards the policy’s cash value accumulation.

With whole life insurance, your premium is guaranteed never to increase, and the cash value is guaranteed to earn a specific interest rate.

With whole life, you can rest assured that your policy will remain constant in price, its cash value will grow, and the death benefit will be paid to your beneficiaries when you die.

Universal life insurance

Like whole life insurance, a portion of every premium dollar you pay towards your universal life insurance policy is also allocated towards the cost of the life insurance and the cash value accumulation.

Universal life insurance allows you to increase or decrease your premium if you choose, and in some cases, you can also adjust the policy’s death benefit.

Another difference between whole and universal life insurance is the interest rate credited to the cash value. Your cash value account will receive a fixed, guaranteed interest rate with whole life insurance. With universal life insurance, the life insurance company will set the interest rate each year based on market conditions. This can be beneficial during periods when interest rates are higher, but it can also be detrimental during periods of low or stagnant interest rates.

A worst-case scenario with universal life can occur if you’re paying the minimum premium to keep the policy in force and interest rates drop. If this happens, you’ll be required to raise your premium, or the policy can lapse.

This can’t happen with whole life insurance, making it a more secure option for cash value life insurance.

Can you access cash value immediately after you get a life insurance policy?

Your ability to access cash value immediately after a policy is issued will depend on the life insurance company’s terms and conditions. However, in most cases, cash value does not begin to accumulate and become available to the policy owner until 2-5 years after the policy has been issued.

There is one exception to the rule concerning the immediate availability of cash value – the single premium life insurance policy.

Unlike most life insurance contracts where you pay the premium monthly or annually, a single-premium policy requires only one premium payment during your lifetime. Of course, that single premium payment can be substantial based on the face amount of the policy.

For example, a single premium life insurance policy may have a minimum payment of $5,000 to $10,000, but that often comes with a relatively low coverage amount. Higher coverage amount single premium policies could require six-figure payments to secure. The upside to the single premium policy is that cash value is effective immediately. If you’re considering a single premium life insurance policy, it’s wise to consult with a financial professional first.

Does it make sense to buy life insurance with immediate cash value?

If you’re under 59 ½, it usually doesn’t make sense to buy a single premium life insurance policy to access the cash immediately.

The reason is that a single-premium policy is classified as a “modified endowment contract (MEC)” by the IRS and carries a tax penalty of 10% on gains in the cash value withdrawn before age 59 ½.

For single-premium policyholders over 59 ½, the cash value can be accessed without a 10% penalty and used for expenses such as long-term care.

Suppose your primary concern is immediate coverage and not accessing cash value. In that case, some policies require no medical exam and have no waiting period before the life insurance protection takes effect.

Can you get life insurance with immediate coverage?

If you want immediate coverage, consider an affordable term life insurance policy. Your term life policy won’t have a cash value component, but it will pay a death benefit to your beneficiaries if you die before the term expires.

In many cases, a term life insurance policy’s cost of insurance is lower than permanent insurance, and coverage can start in days, not months.

A licensed life insurance agent can also explain the differences between various types of life insurance and help you find the best cash value life insurance policy to meet your needs.