What Is Cash Value Life Insurance And How Does It Work?
First, cash value policies last forever, unlike term life policies, which expire after a predefined period of time. Cash value life insurance has a savings component called, where a portion of your premiums is allocated to the cash value account. This account earns interest and grows on a tax-deferred basis.
The policy owner can withdraw and use the cash value in different ways, such as paying policy premiums or as a cash loan to spend on anything they desire.
As with any form of life insurance, when you die, the insurance company will pay out the death benefit as a tax-free cash payment. Your beneficiaries are free to use the money for any purpose (there are absolutely no restrictions).
Where cash value life policies can get complicated is with the premiums and the cash value accumulation.
- Premiums: By default, the premiums of a cash value life insurance policy will not increase. Whole life insurance, a type of cash value policy, has a guaranteed level premium. However, with universal life insurance (another type of cash value policy), there are circumstances in which premiums could rise, or the insurance company may request a lump-sum payment to keep the policy solvent. It’s also worth noting that most universal life insurance policies give you the flexibility to pay less than the minimum target premium.
- Cash value growth: Every time you make a premium payment, a portion is redirected to the cash value account. Additionally, the cash value account will earn interest, which is typically about 3-4% annually.
Types Of Cash Value Life Insurance Policies
| Policy Features | Whole Life Insurance | Universal Life Insurance | Indexed Universal Life Insurance | Variable Life Insurance |
|---|---|---|---|---|
| Length of coverage | Forever | Forever | Forever | Forever |
| Premiums | Level | Level by default, but can increase and can often be less than the minimum target premium | Level by default, but can increase and can often be less than the minimum target premium | Level by default, but can increase and can often be less than the minimum target premium |
| Guaranteed death benefit payout | Yes | Yes | Yes | Yes |
| Cash value growth | Very predicatable | Varies based on current interest rates | Offers a minimum rate of return while the upside performance is tied to whichever index funds the company selects | Is based on different market investment options which means there is a potential for loss |
| Potential payout of dividends | Yes | No | No | No |
| Cash surrender value | Yes | Yes | Yes | Yes |
| Policy loans | Yes | Yes | Yes | Yes |
| Potential for cash value growth via market performance | No | No | Sometimes | Yes |
Below are the various types of cash value life insurance policies and how they work:
- Whole life insurance: The premiums and death benefit are guaranteed to remain the same. Whole life policies have a predictable interest rate for cash value growth. Furthermore, participating whole life policies can pay dividends, which can be taken as cash or to increase the death benefit. Whole life policies are always going to cost more than all other types of cash value life insurance policies.
- Universal life insurance: The death benefit and premiums remain the same. However, the policy owner can opt to pay less than the target premium. Note that paying less than the target premium can result in insufficient cash values, prompting the insurance company to request a lump-sum payment to keep the policy solvent, along with a permanent increase in the minimum premium due.
- Indexed universal life insurance: Like a normal universal life insurance policy, the premiums can typically be increased or decreased at will. The money in the cash value account is tied to various index funds such as the S&P 500. There are minimum guaranteed rates of return along with caps on the topside performance.
- Variable life insurance: The cash value is put into various investment options. The performance of those investment products is what ultimately determines the cash value growth or loss.
Pros And Cons Of Cash Value Life Insurance
- Coverage lasts forever.
- Level premiums that remain the same.
- Builds equity, tax-deferred, that can be used while alive for all sorts of purposes.
- There are guaranteed minimum interest rates for cash value growth.
- Costs much more than term life insurance.
- Certain types of cash value policies can be very complex and difficult to understand.
- Policy loans reduce the death benefit and accrue interest, which causes the loan to grow over time if not repaid.
The Cost Of Cash Value Life Insurance
All life insurance rates (including cash value policies) are based on multiple factors such as your age, gender, type of policy, health status, tobacco or nicotine usage, lifestyle, and how much coverage you purchase. Below are sample whole life and universal life insurance rates.
Whole life insurance rates
Universal life insurance rates
Cash Value Charts
Every life insurance policy with cash value will contain a cash value table that clearly outlines the guaranteed values for each policy year. How much cash value a policy accumulates depends on the policy type and the premiums.
Below are some sample whole life cash value charts for $100,000, $250,000 , and $500,000 in coverage. All rates shown were calculated for a participating whole life policy with a non-tobacco preferred rating, rounded to the nearest dollar, and are valid as of 05/07/2026.
$100,000 policy
$250,000 policy
$500,000 policy
How You Can Use The Policy’s Cash Value
The money that accrues in the cash value account belongs to the policy ownerPolicy owner
The policy owner is the person or entity who controls a life insurance policy. Additionally, they are the owner of any cash value. Only the policy owner can make inquiries or changes to the policy or access the cash value.. They can utilize the funds in a variety of ways, such as:
- Pay premiums: Most cash value life insurance policies allow you to opt for a free feature (usually called “automatic premium loan provision”). This feature will automatically draw on the cash value to make premium payments, keeping the policy from lapsing.
- Loans: You can withdraw the cash value and spend the money however you desire.
- Reduced paid-up option: This feature allows you to convert the policy from its original death benefit into a fully paid-up life insurance policy with a lower death benefit. Paid-up life insurance lasts forever and requires no premium payments. The final amount of paid-up life insurance you get is based on the current cash value when you exercise this option. For example, if you have $50,000 in cash value, it would likely translate into roughly $100,000 in reduced paid-up life insurance.
- Surrender value: If you cancel a cash value life insurance policy, the insurance company will pay you the “cash surrender valueCash Surrender Value
The amount of money refunded to the policyowner upon cancelling (aka "surrendering") the policy. The surrender value is generally equal to the current cash value or very close to it.“. It’s essentially equal to the current cash value when you cancel the policy. - Additional paid-up life insurance: If you have a dividend-paying policy, you can opt to use those dividends to purchase additional paid-up life insurance, thus increasing the net death benefit of the policy.
- Cash dividend payment: If you have a dividend-paying policy, you can opt to receive dividends as cash, which you can spend however you wish.
It’s very important to understand that cash value withdrawals in any form will count as a loan against the policy. You’re not required to pay back policy loans.
However, it’s advisable to do so, as policy loans accrue interest (typically 3-5%), causing them to grow over time. Also, outstanding policy loans will reduce the death benefit. For example, if you have a one million dollar life insurance policy with a $250,000 policy loan, the insurer will only pay out $750,000.
Cash Value Life Insurance Vs Term Life Insurance
| Policy Features | Term Life Insurance | Whole Life Insurance | Universal Life Insurance |
|---|---|---|---|
| Length of coverage | Usually 10, 20 or 30 years | Forever | Forever |
| Fixed premiums | Often, yes, but sometimes premiums increase over time | Yes | Often, yes, but under certain circumstances, the premiums can increase |
| Affordability | Lowest cost | Usually costs 5-20x more than term coverage | Always costs 2-5x more than term coverage |
| Guaranteed death benefit payout | Yes | Yes | Yes |
| Cash surrender value | No | Yes | Yes |
| Builds cash value | No | Yes | Yes |
| Policy loans | No | Yes | Yes |
| Potential payout of dividends | No | Yes | Yes |
| Medical exam required | Sometimes | Sometimes | Sometimes |
| Ideal reasons to buy | Temporary needs such as covering a mortgage or replacing income | Permanent needs such as paying for your final expenses | Permanent needs such as estate planning or supplemental income for a surviving spouse |
Reasons to buy cash value life insurance
Cash value life insurance may be a good fit for you if:
- Final expenses: If you need life insurance to cover your funeral costs, a cash value policy is ideal because it lasts forever. There are even dedicated burial insurance policies for this very purpose.
- Estate planning: High-net-worth estates may be subject to death taxes. It’s quite common for wealthy families to use cash value life insurance policies to offset the estate taxes they will face.
- Supplement retirement: If you’re a high earner and have maxed out your retirement accounts (such as a 401 (k) or IRA), a universal life cash value policy can be another way to invest your money for future retirement needs.
- Care for an adult disabled child: Parents who have a disabled child who requires permanent care can buy a cash value policy to help pay for the child’s continued care after the death of their parents.
When you shouldn’t buy cash value life insurance
It would be unwise to buy a cash value life insurance policy for any of the following circumstances:
- Debts: If you want life insurance to pay off all your debts, such as a mortgage, then cash value policies would not be ideal. Term life insurance would be a better option.
- Income replacement: You should buy term life insurance if you have dependents who rely on your income.
- Limited budget: You can buy term life since it’s much cheaper, and then when your budget expands, you can buy a cash value policy.
Frequently Asked Questions
In most cases, cash value withdrawn from the policy is not considered taxable income, so no taxes are due. The only time taxes would be due is if the cash value withdrawn exceeds the total premiums you’ve paid into the policy. This is an exceptionally rare occurrence, but it can happen.
Cash value life insurance policies are only worth buying if your overall life insurance needs are permanent. For example, if you need life insurance for estate planning, to cover funeral costs, or for any other permanent need, then yes, cash-value policies are worth buying. However, they should be avoided if you have temporary needs such as paying off a mortgage or replacing your income while caring for non-adult children.
The cash value in a life insurance policy evaporates upon the insured’s death. It is not paid in addition to the death benefit. Cash value is only relevant and usable while you’re alive. After death, it’s gone and lost forever.
In most cases, it takes about 2 years for a cash value life insurance policy to begin accruing equity. The only time cash value accrues immediately is with single-premium whole life insurance policies. With those, there is immediate cash value available right away.
Standard term life insurance policies don’t have cash value. The only ones that do are return-of-premium term life policies, which do have a cash value component. However, it should be understood that the cash value in a return-of-premium term life policy is not accessible during the term. It’s only accessible at the very end of the term. Basically, the insurer will have you choose if you want to A) take the cash value as a lump sum payout equal to all the premiums you’ve ever paid or B) convert the cash value into a paid-up life insurance policy.
When you withdraw cash value from a life insurance policy, you’re never borrowing from the death benefit. The death benefit and the cash value are two separate components. Cash withdrawals are always and only from the cash value account.
- Nationally licensed life insurance agent with over 16 years of experience.
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Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
