There are two main types of life insurance: term and cash-value. While term policies are typically more popular, simply because they offer life insurance protection for less money, cash-value policies have additional benefits you may want to consider.

What’s the difference between term and cash-value life insurance?

Like its name, term life insurance provides temporary protection for a specific term or time period — most often 10, 15, or 20 years. Once that term is over, you’re no longer covered by the life insurance policy. You may be able to renew the policy, but because you’re older, your premiums will likely increase.

A cash-value life insurance policy, on the other hand, offers lifetime protection, as long as you continue to pay your premiums. In addition, cash-value life insurance gives you the potential to build cash value that you may be able to access later, to use for unexpected expenses, long-term care costs, or help supplement your retirement income. In short, while cash-value policies typically cost more than term policies, they offer more flexibility to be used in different ways.

Benefits of cash-value life insurance

While the death benefit for both term and cash-value life insurance is paid to the beneficiary free of income tax¹, cash-value life insurance has other benefits that you won’t get with a term policy.

• Cash value — Each time you pay premiums, a portion of that money goes toward the policy’s cash value. This cash value grows at a rate specific to the type of policy and how the policyowner directs the cash value to be allocated.. With some types of cash-value life insurance policies, you have the ability to select the investment options that drive your cash value’s potential growth (or loss). In other types of policies, like whole life, the insurance company sets the growth rate for the cash value. Either way, any cash value growth is tax deferred, so you won’t pay current taxes on interest that builds up within the account.
• Stable premiums — Unlike term life insurance premiums, which will increase at renewal, permanent life insurance premiums will generally stay the same for as long as you own the policy, contingent upon the performance of the policy. 
• Flexibility to tailor the policy to your needs — Cash-value life insurance often offers what are called riders³, or additions to the policy, that let you customize it to meet your needs. For example, you may add a Long-Term Care, Chronic Illness, or Critical Illness rider to your policy, which can allow you to use the death benefit to pay for health care costs if you are diagnosed with a certain illness or need long-term care.

Uses for cash-value life insurance

If you’re looking for short-term life insurance to protect your family just for as long as you need to pay off a mortgage, get your kids through college, or pay off student loans, then less expensive term life insurance may be a better fit for you. However, if you have significant financial obligations that are not time sensitive, such as protecting your legacy for your children, you might want to consider a cash-value life insurance policy.

Besides providing a tax-advantaged death benefit, cash-value life insurance can be used to:

• Paying estate taxes — If you are leaving your beneficiaries a large enough estate, they may have to pay estate taxes on their inheritance². Proceeds from cash-value life insurance can be used to offset those taxes and help maximize the amount you leave your heirs.
• Help supplement your retirement income — Consider taking withdrawals or loans from your policy’s cash value to pay for retirement expenses⁴.

There are a number of different kinds of cash-value life insurance policies, each with their own features, benefits and considerations. Talk to your financial professional to see if a cash-value life insurance policy may be right for you.