Cash value is what makes permanent life insurance different from term life. While term insurance provides only a death benefit, permanent policies build wealth you can access during your lifetime. Think of it as a savings account that grows inside your life insurance policy.
How Cash Value Works
When you pay premiums on a permanent life insurance policy, your money goes to three places:
- Cost of insurance: The actual cost to insure your life
- Policy fees: Administrative costs and charges
- Cash value: The remainder goes into your savings component
Over time, your cash value grows through interest, dividends, or market-linked returns (depending on your policy type). This growth is tax-deferred, meaning you don't pay taxes on the gains each year.
Michael pays $500/month for a whole life policy. After the cost of insurance and fees, about $200 goes into cash value each month. After 20 years, his cash value has grown to $85,000 through compound growth and dividends. He can borrow against this amount tax-free, use it to pay premiums, or continue letting it grow.
Ways to Access Your Cash Value
1. Policy Loans
The most popular method. You borrow against your cash value at a low interest rate:
- No credit check or approval process
- Loan proceeds are tax-free (as long as policy stays active)
- You set your own repayment schedule (or don't repay at all)
- Unpaid loans reduce your death benefit
2. Direct Withdrawals
You can withdraw cash directly from your policy:
- Withdrawals up to your "basis" (total premiums paid) are tax-free
- Withdrawals above basis may be taxable
- Reduces your death benefit permanently
- May reduce future cash value growth
3. Surrendering the Policy
You can cancel the policy and receive the full cash surrender value:
- Ends your life insurance coverage
- Gains above your basis are taxable
- Surrender charges may apply in early years
Policy loans are often the smartest way to access cash value because your money continues to earn dividends or interest even while you're borrowing against it. This "uninterrupted compounding" is a key advantage of permanent life insurance.
Cash Value vs. Death Benefit
Many people confuse these two amounts:
- Death benefit: The amount paid to your beneficiaries when you pass away
- Cash value: The living benefit you can access while alive
In most policies, your beneficiaries receive only the death benefit when you die, not the death benefit plus cash value. However, the cash value can:
- Help keep your policy in force if you stop paying premiums
- Be used to purchase additional coverage
- Provide living benefits during your lifetime
Types of Cash Value Policies
Whole Life Insurance
Cash value grows at a guaranteed rate plus dividends from the insurance company. Most predictable but typically slowest growth.
Universal Life Insurance
Cash value earns a declared interest rate that can change. Offers more flexibility in premiums and death benefit.
Indexed Universal Life (IUL)
Cash value growth is linked to stock market index performance (like the S&P 500) with a floor protecting against losses. Potential for higher returns with downside protection.
Variable Universal Life
Cash value is invested in sub-accounts similar to mutual funds. Highest growth potential but also highest risk.
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Get a Free ConsultationFrequently Asked Questions
How long does it take to build cash value?
Cash value typically builds slowly in the first few years as most of your premium covers insurance costs and fees. By years 10-15, growth accelerates significantly through compounding. Policies are often designed to be most beneficial when held for 20+ years.
Can I lose my cash value?
In whole life and IUL policies, your cash value is protected from market losses. In variable universal life, your cash value can decrease if your investments perform poorly. Policy loans that aren't managed properly can also erode cash value.
Is cash value life insurance a good investment?
Cash value insurance works best as a wealth-building tool for high earners who have maxed out other tax-advantaged accounts (401k, IRA). It offers tax-deferred growth, tax-free access, and a death benefit. It's not ideal as your primary investment vehicle for everyone.
What happens to cash value if I stop paying premiums?
Many policies let you use accumulated cash value to pay premiums, keeping your coverage active. If cash value runs out and you don't resume payments, the policy will lapse. Some policies have "paid-up" options that provide reduced coverage without further payments.