What Is Cash Value Life Insurance?

Cash value life insurance is permanent life insurance. It works like a savings or investment account and allows you to access money while you’re still alive. Money in a cash value account grows tax-deferred over time and is usually tied to an interest rate or underlying investments.

Understanding Cash Value Life Insurance

The primary purpose of life insurance is to provide money for your beneficiaries after you die.

But some permanent life insurance policies also feature a cash value account, or money you can access while you’re still alive.

The premium — or money you pay the life insurance company — goes to three different places:
  1. Toward the cash value account
  2. Toward the actual cost of insurance
  3. Toward fees, administrative costs and other charges

The breakdown of how much is allocated to the cash value account versus how much goes toward insurance can vary by policy.

The rate of return — or how quickly your money grows — also varies by policy. It depends on the type of insurance you buy and your contract terms.

For example, the cash value of variable life insurance is based on the performance of underlying investments, while the cash value of whole life insurance is tied to a fixed interest rate.

Cash value life insurance costs more than term life insurance.

Types

Cash value is a feature of most permanent life insurance policies.

Permanent life insurance provides lifelong coverage and never expires. Term life insurance — which provides coverage for a specific time — does not build cash value.

Life Insurance Policies with a Cash Value Component
Whole Life
Whole life insurance features fixed premiums. Your cost will not increase over time. The cash value component also offers a guaranteed fixed rate of return, usually around 2 percent a year.

A whole life insurance policy is considered the simplest type of permanent life insurance because everything is fixed and guaranteed, including the premiums, the death benefit and the cash value’s rate of return.

Universal Life
Universal life insurance is more complicated than whole life but offers more flexibility. Some universal life insurance policies let you adjust your death benefit and reduce your premiums, provided there’s enough money in your cash value account.

Cash value growth can be based on a stock index, such as the S&P 500 (indexed universal life), or subaccounts that contain selected investments (variable universal life).

Variable Life
Variable life insurance is often considered the most complicated form of permanent life insurance. These policies allow you to invest in different stocks, bonds or mutual funds held within a cash value subaccount.

A variable life insurance policy offers the greatest potential returns — and the greatest risk. You can lose cash value if your investments tank. These policies also feature high fees and administrative costs.

How Do You Access the Cash Value?

You can withdraw money from your policy’s cash value account or take a loan against it and use the money for any reason.

You can also receive your cash value by terminating the policy. If you do so, the insurance company will return any cash you’ve accumulated minus surrender charges and fees.

How to Access Money in a Cash Value Life Insurance Policy
Take Out a Loan
You can borrow against the cash value of your permanent life insurance policy. Your loan will accumulate interest until it’s paid back in full.

If you die before the loan is repaid, the amount you owe — plus interest — is subtracted from the death benefit payout your beneficiaries receive.

Cash value loans offer low interest rates and do not affect your credit score.

Withdraw Funds
You can withdraw money after you’ve built enough cash value. Any amount you withdraw from investment gains is taxable. Similar to taking out a loan, making a withdrawal can also reduce the payout to your beneficiaries.
Surrender the Policy for Cash
Surrendering your policy is the same as canceling your coverage. You won’t receive any money you paid in premiums, but you can receive money inside your cash value account.

However, you won’t get the entire amount back because those funds are reduced by surrender fees and charges. If you forfeit your policy two to three years after purchasing it, you may not receive any cash value at all. Insurers also deduct outstanding loan balances, and the surrender value is subject to taxation.

Use it to Pay Premiums
Some cash value life insurance policies — such as universal life — let you use the cash to cover premium payments. You must have enough money built up in your cash value account to do so. Typically, you can only do this after you’ve owned your policy for at least one year.

Is Cash Value Life Insurance Right for You?

There are a few important details to consider before purchasing a cash value life insurance policy.

First, you must be able to afford it. Cash value life insurance can cost six to 10 times more than the same amount of coverage from a term life insurance policy. The cash value feature and policy fees make these products more expensive.

It can also take years to build enough cash value to borrow against or withdraw. You may need to wait two to three decades to build sufficient cash.

In the meantime, you’ll pay extra for a feature you can’t really use.

Another major drawback is that the remaining cash value of your account returns to the insurance company when you die.

Some companies allow beneficiaries to receive the death benefit plus cash value — but you’ll pay higher premiums for this feature.

Term life insurance is better suited for most people. It’s cheaper, easier to understand and still provides a large death benefit to your heirs.

According to Forbes, cash value life insurance is best suited for high-income earners who have already maxed out retirement account contributions and want another way to build tax-deferred savings.

Forbes also notes that cash value policies can be used to help heirs pay estate taxes.

Last Modified: October 23, 2020

5 Cited Research Articles

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  2. Chorpenning, A. (2020, May 20). What To Know About Cash Value Life Insurance. Retrieved from https://www.forbes.com/advisor/life-insurance/cash-value-life-insurance/
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  4. LifeHappens.org. (n.d.). Permanent Life Insurance. Retrieved from https://lifehappens.org/life-insurance-101/permanent-insurance/
  5. Washington Office of the Insurance Commissioner. (n.d.). Types of cash value life insurance. Retrieved from https://www.insurance.wa.gov/types-cash-value-life-insurance