What Is a Savings Account With an Insurance Company?

While the term “savings account with an insurance company” is commonly used, it does not refer to a conventional bank deposit account. Instead, it describes financial products offered by insurance companies that allow for cash accumulation. These products help individuals build financial value, often with features distinct from typical bank savings, such as long-term growth potential and unique access options.

Understanding Insurance Company Savings Products

The “savings” component within these insurance products is known as “cash value” or “account value.” This value grows as a portion of premiums paid into the policy is allocated to it. Unlike traditional bank savings accounts, which are FDIC insured and regulated by banking authorities, insurance products are regulated at the state level by departments of insurance and are not FDIC insured. Their purpose often extends beyond simple saving, frequently serving as part of a life insurance policy or a retirement income strategy.

Common Types of Insurance Savings Products

One common type of insurance product with a savings component is whole life insurance. This permanent life insurance policy builds cash value, providing a living benefit accessible by the policyholder. The cash value in whole life policies is guaranteed to grow at a predetermined rate and may also earn dividends, which can be reinvested to increase the cash value.

Another category includes deferred annuities, which are contracts designed for long-term savings, typically for retirement income. Fixed annuities offer guaranteed interest rates, while variable annuities allow the account value to fluctuate based on underlying investment options. Indexed annuities offer growth potential linked to a market index, often with some downside protection. Each type focuses on accumulating funds during an “accumulation phase” before conversion into an income stream.

Growth and Accessing Funds

Cash value or account value in these insurance products increases through various mechanisms. For fixed products, growth often comes from guaranteed interest rates specified in the policy contract. Participating life insurance policies may also pay dividends, which, while not guaranteed, can contribute to cash value growth or reduce premiums. For variable products, growth is tied to selected investment sub-accounts, introducing market risk.

Policyholders can access their accumulated funds through partial or full withdrawals. These may be subject to surrender charges, especially in early years, and can reduce the policy’s death benefit or account value. For life insurance policies, policyholders can take loans against their cash value, using the policy as collateral. These policy loans generally do not require credit checks and often have flexible repayment terms, but outstanding balances and accrued interest will reduce the death benefit if not repaid. For annuities, accumulated funds can be accessed through withdrawals or, more commonly, by annuitization, which converts the account value into regular income payments for a specified period or for life.

Safety and Guarantees

Funds held within insurance company savings products are not FDIC insured. Instead, a safety net is provided by state-level life and health insurance guarantee associations. These associations offer protection to policyholders if an insurance company becomes insolvent, up to certain limits that vary by state. For instance, many states provide coverage up to $300,000 for life insurance death benefits, $100,000 for life insurance cash surrender values, and $250,000 for annuity benefits.

Beyond state guarantee associations, the financial stability of the insurance company itself is a primary indicator of security. Independent rating agencies, such as A.M. Best, S&P, Moody’s, and Fitch, assess the financial strength and claims-paying ability of insurance companies. Reviewing these ratings provides insight into an insurer’s capacity to meet its long-term obligations.

Tax Considerations

The growth of cash value or account value within these insurance products is tax-deferred. Earnings are not taxed annually as they accumulate, but rather when funds are withdrawn or distributed.

For life insurance, withdrawals up to the amount of premiums paid (cost basis) are generally income tax-free, following a “first-in, first-out” (FIFO) rule. However, withdrawals exceeding the cost basis are taxed as ordinary income. Policy loans from life insurance are generally not considered taxable income unless the policy lapses with an outstanding loan. The death benefit paid to beneficiaries from a life insurance policy is typically income tax-free.

For annuities, withdrawals are generally taxed on a “last-in, first-out” (LIFO) basis, meaning earnings are considered withdrawn first and are subject to income tax. Any withdrawals from an annuity before age 59½ may also be subject to an additional 10% federal income tax penalty, unless an exception applies. This penalty discourages early use of funds intended for retirement.