Term life insurance is a pretty straightforward form of life insurance. You pay premiums to the insurance company, and if you die during the policy’s term, your beneficiaries receive a death benefit. If you don’t die during the policy term and the policy term expires, or if you cancel the policy, there is no refund or surrender value for term life insurance.

Alternatively, permanent life insurance, also called cash value life insurance, is an entire category of life insurance plans that last as long as you pay the premiums. Permanent life insurance is pricier than term life insurance, but permanent policies have a cash value component that acts like an investment or savings account and grows tax-deferred over the life of the policy.

Added cash value might sound appealing – and it is, for certain situations. But for the average person, a permanent life insurance policy – even with the added cash value – doesn’t make financial sense. You can usually get the financial protection you need for your family and save more money in the long run with a term life policy.

How cash value life insurance works

Cash value life insurance policies are made up of two components: a cash value component and a permanent life insurance component.

There are several types, including:

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

The differences in these cash value policies come from how the cash value grows and how it can be used.

Methodology: Information based on policies offered by Policygenius in 2020.

What can you do with a cash value policy?

The value of a cash value policy is in what you can do with it once the cash value reaches a certain amount. Note: it takes a long time to build up the cash value. Most of the growth happens when you’ve had the policy for two or three decades, so if you surrender the policy within the first 10 years, it’s unlikely that your cash value will be greater than the total premiums you have paid.

Once you've accumulated enough cash value, you can:

Take out a policy loan.

Usually, you'll get lower interest rates than other types of loans against the cash value. But keep in mind that if you die before your loans are repaid (or if your policy lapses and you have an outstanding loan), the unpaid loan will be subject to tax.

Use the cash value to pay premiums.

This can be a great way to avoid an unwanted policy surrender due to unpaid premiums, but usually you can only do this after at least one year of owning the policy. If you deplete the entirety of the cash value to pay your premiums, however, your policy will lapse.

Surrender the policy and withdraw the cash if you no longer need life insurance.

A few caveats: if you surrender the policy, any cash profit you've made is subject to tax. And doing so during the first two to three years may mean you don't get any of the cash value or paying high administrative fees.

→ Read more about the types of cash value policies and how the cash value can be used.

Why term life insurance doesn’t have a cash value

Term life insurance is pure insurance. You just pay your premiums for the term of your policy, and if you don’t die, the policy ends when your term ends and you are no longer covered.

According to Policygenius quotes, term life insurance is five to 15 times less expensive than a comparable permanent life insurance policy. Term life insurance is also more straightforward than permanent life insurance and covers you while you’re most likely to have financial dependents or outstanding debt, making it the better choice for the majority of consumers.

But the simplicity and relatively affordable rates of term life insurance mean that there are things you can’t do with it. Because it has no cash value, there is no surrender value to the policy. You also can’t take a loan out from your term policy (though you may be able to use a policy as collateral for a loan through a process called collateral assignment, which we do not recommend due to the potential interest and taxes it can incur.)

Ultimately, term life insurance is the best product for most people. A licensed independent agent can help you determine if a term life insurance or cash value life insurance policy is better suited for your coverage needs.