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

Alevin Chan
Last updated Feb 18, 2022

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. 

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. 

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

ProsCons
Accumulates cash value over time, which can improve the overall value of your policyPremiums are comparatively high, and early surrender carries risk of financial loss
Can be tapped on for a loanTaking a policy loan reduces total benefit payout, and interest is charged on the loan
Offers coverage until end of life without need for renewals (as long as sufficient premiums are paid)You may have to bear some or all of the investment risk
May use cash value to cover premium paymentsMay take a long time to ‘break even’, i.e., the point when the cash value equals the total premiums paid thus far 

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. 

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

Having a cash value component also extends a living benefit, allowing you to access your money while you’re still alive. This offers some degree of flexibility over other types of life insurance. 

However, 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.

Cash value life insurance also 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. 

This also means that if you decide to surrender your policy early on, you are likely to suffer a financial loss.

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. 

In any case, cash value life insurance 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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By Alevin Chan
An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.


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