Cash value life insurance lasts your entire life and also includes an investment component — the cash value — that grows tax-deferred over the life of the policy. You can use the cash value to take out a loan, and, in some cases, pay your premiums.
But cash value life insurance gains aren't as high as traditional investments and are most useful for people who have a specific need for permanent coverage or have already maximized contributions to other investment accounts.
What is cash value life insurance?
The cash value of life insurance is the portion of a permanent life insurance policy that functions as a tax-deferred savings account. The term “cash value life insurance” can refer to any life insurance policy that includes this feature. Unlike the death benefit, which your beneficiaries get when you die, the cash value of your policy can be used while you’re alive.
How your life insurance policy earns cash value over time
Every time you make a premium payment, part of the money goes toward the cost of maintaining the policy, and part goes toward the cash value. The exact distribution depends on your individual policy. Over time, the cash value grows at a set low interest rate determined by the insurer.
Significant cash value accumulation can take years — and even decades.
The graph below illustrates an example of how both your cash value and death benefit can increase over years of holding the policy. Some cash value life insurance policies have increasing death benefits, and some policies offered through mutual companies pay dividends, which can increase your cash value as well as your death benefit.
Example of cash value life insurance
Types of life insurance with cash value
Most types of permanent life insurance policies — including whole life and universal life — have a cash value component. Permanent policies last your entire life as long as you continue to pay the premiums. Below are a few of the main types of policies that have a cash value feature.
Whole life insurance
Cash value whole life insurance is a popular type of permanent life insurance policy. In a whole life insurance policy the cash value grows at a fixed interest rate set by your insurer. Interest rates on whole life insurance cash value accounts are typically lower than the rates you’d receive from investing independently.
Variable life insurance
Variable life insurance policies are similar to whole life policies, but instead of the cash value growing at a fixed interest rate, you can invest the cash value in various funds offered by the insurance company. You may earn more interest this way than you would with a whole life policy, but you take on much more investment risk.
Universal life insurance
Universal life insurance is a more flexible type of permanent life insurance policy because you can increase or decrease how much you pay toward your premiums, and eventually use your cash value to pay those premiums. However, if you decrease your payments without having enough cash value to cover the difference, your policy could lapse.
Variable universal life insurance
Variable universal life insurance (VUL) is a type of universal life policy in which the cash value grows based on the performance of funds of your choosing. This type of policy comes with much more investment risk than other types of cash value life insurance.
Indexed universal life insurance
Indexed universal life insurance (IUL) is a type of universal life policy in which the cash value grows based on a market index (for example, the S&P 500). The insurance company will allow the policyholder to choose between select offerings. Like VUL, IUL comes with more investment risk than other types of policies.
Guaranteed issue life insurance
Guaranteed issue life insurance is a type of whole life insurance policy that offers smaller coverage amounts meant to be used for end-of-life expenses, such as funeral costs. These policies have no medical requirements to apply, so they’re ideal for people who may not be able to qualify for a traditional policy due to health reasons, or for those who are seeking a smaller death benefit to cover final expenses.
Guaranteed issue whole life insurance policies can accumulate a cash value, but that’s generally not the primary purpose of these policies.
Benefits of cash value life insurance
Coverage lasts your entire life. You don’t have to worry about coverage expiring (as long as you don’t surrender your policy or let it lapse) because cash value policies are permanent.
Cash value life insurance can be used to offset estate tax. If your estate falls into the qualifying bracket for estate tax, the life insurance death benefit can be used to offset taxes and guarantee an inheritance for your beneficiaries.
Cash value gains are tax-deferred. Cash value life insurance can provide another tax-deferred investment vehicle if you’re already maximizing contributions to other accounts, like a 401(k) or Roth IRA.
Drawbacks of cash value life insurance
It’s more expensive. Cash value life insurance is typically five to 15 times more expensive than a comparable term life insurance policy. If your primary goal is putting a financial safety net in place for your family during your prime earning years, other life insurance products — including term life insurance — can get the job done at a cheaper price.
Cash value can take time to build. In order to accumulate significant cash value, it can take years and sometimes decades. With a cash value policy, it’s important to be certain you’ll be able to pay the premiums for the life of the policy in order to receive the full benefits.
Cash value is not paid to beneficiaries. When you die, your cash value typically stays with the insurance company. Your beneficiaries will still receive the death benefit.
Other investment options could yield higher rates of return and more flexibility. Investing separately from your life insurance policy allows you to control how much you invest at any given time.
How to use the cash value from your life insurance
There are several different ways you’re able to use cash value, including:
Paying your premiums. Some insurance policies — like universal life insurance — allow you to use your cash value to pay premiums.
Take out a loan against the cash value. You’re able to take a loan out against your cash value, but you have to pay it back, or it will be deducted from the death benefit if you were to die.
Withdraw funds from your cash value. You can also withdraw money from the cash value. If you withdraw money without paying it back, it’s typically subtracted from the final death benefit. It’s best to confirm the specific parameters of your policy before making a withdrawal.
Surrender the policy for cash. If you find you no longer need your policy, you can surrender the policy for your cash value, minus any surrender fees. If you surrender the policy before 10 or so years, you’d likely have to pay fees to your insurer.
Is cash value life insurance right for you?
Cash value life insurance might be right for you if you have long-term coverage needs, complex estate planning goals, or if you’re already maximizing contributions to other tax-advantaged accounts and looking for another option to diversify investments.
There are also many different life insurance policies that include a cash value component, so it ultimately depends on the type of policy you purchase.
Since many cash value policies are significantly more expensive than other products, like term insurance, many people choose to cover their financial obligations with a term life policy and then invest the difference separately.
This allows them to choose how much they invest, instead of being tied to a steep premium. Cash value life insurance policies often have high surrender rates because they’re expensive to maintain, so it’s important to think through cost before purchasing.
If you’re not sure which type of life insurance is best for you, a Policygenius expert can help you compare options from top insurers for free.
Other types of life insurance
Whole life vs. universal vs. guaranteed universal life insurance
Frequently asked questions
What is the cash value of a life insurance policy?
The cash value portion of a life insurance policy is the feature that acts as a tax-deferred savings account.
What types of life insurance policies have cash value?
Generally speaking, permanent life insurance policies have cash value, and term life insurance policies don’t.
Do you have to pay back a cash-value withdrawal?
You technically don’t have to pay back a withdrawal, but the amount will typically be subtracted from the death benefit. It will reduce your cash value too, so be careful if you’ve been using your cash value to pay premiums.
Should you choose a life insurance policy with cash value?
If you have permanent life insurance needs related to estate planning or lifelong dependents, for example, cash value life insurance may be worth it for you. If you’re already maximizing contributions to other tax-advantaged accounts, cash value life insurance can provide you an additional investment vehicle. These policies are generally more complex than term policies and can come with fees, so it’s best to consult with a financial advisor or insurance professional first.
Does guaranteed issue life insurance have a cash value?
Guaranteed issue whole life insurance policies can accumulate cash value, but often a smaller amount than other policies with more coverage. Cash value growth isn’t the primary purpose. The main goal of a guaranteed issue life insurance policy is to cover final expenses, like a funeral.
What happens when you withdraw cash from life insurance?
When you withdraw from your cash value, your death benefit will likely be reduced, but you won’t have to pay taxes on the withdrawal as long as it’s less than the total amount you’ve paid in premiums so far.