Cash value is a feature of permanent life insurance that gives your policy a savings and investment factor. 

This feature comes in handy in an emergency because policyholders can loan against or withdraw from the cash value. It also gives the policy owner the certainty of keeping the death benefit if they can’t pay monthly premiums at some point while the policy is in force.  

Since permanent life insurance policies—or whole life policies—are for life (or until you reach the age of 120) and are typically more expensive than term policies, their cash value is a great feature because it provides more than just a death benefit. The cash value of life insurance allows policyholders, who are making contributions for the rest of their lives, to make investments with their monthly premiums. 

Depending on the policy you choose, the cash value in a life insurance policy can grow by interest rate or market value. You can take advantage of the increase in cash value to borrow against, withdraw as cash, or even pay the premium on your life insurance policy.

The cash value in whole life policies is an attractive advantage for insurance consumers. Though policyholders may make higher premium payments on a whole life policy than they would on term life policies, the premium or a portion of the premium goes towards an investment that can be used at your discretion. Because of this, you have more flexibility and more security with permanent life insurance policies.

Using Insurify to compare quotes on permanent life insurance policies will help you make an informed decision on which policy and premium are best for you and will grow cash value.

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How Cash Value Life Insurance Works 

While considering your loved ones’ best interests, choosing a cash value life insurance policy can give you the ability to grow your money. Essentially, the cash value of a life insurance policy is a part of the premium payments deposited into a cash-value account, which is either an investment account or a bank account that grows interest.

If your policy premium is divided and a part of your premium goes into a bank account that grows interest, the interest rate agreed upon with your insurer is guaranteed cash value. If you have two percent interest on your cash value, it will never fall below this line. 

You can determine how much cash value you will gain over a period of time based on this interest rate. Your life insurance agent can inform you of your interest rate and the type of account your premiums are deposited to. 

If a portion of your premium goes into an investment account, then the gains on your cash value will depend on market conditions. It also helps to refer to the cash value chart provided by most life insurance companies

If you outlive the maturity of your whole life insurance policy, meaning that the premiums paid are equal to the death benefit and there are no premiums left, then the premium payment schedule has been satisfied. Your insurance policy is paid up. 

Once your policy is paid up, the insurance coverage continues for the rest of your life, the death benefit is secured, and the cash value of your policy continues to grow in the cash-value account.

Cash value is a living benefit. This means the cash value of your insurance policy is meant to be used while you are alive. It is designed to withdraw, loan against, pay premiums, or purchase more insurance coverage. 

After your premiums grow cash value, you can take out a policy loan. You aren’t required to pay yourself back. But it is a loan nonetheless, and it comes with interest. If you pass away before repaying the loan, the outstanding loan will be subtracted from the death benefit plus interest. 

If you pass away and the cash value of your policy is left in your account, it does not roll over to the death benefit. Beneficiaries will receive the face value of the death benefit. This means a policy with a death benefit of $50,000 and a cash-value accumulation of $1,000 in the account when the policyholder passes away will not increase the death benefit. Beneficiaries will receive the $50,000 face value amount of the death benefit, and the remaining $1,000 is left with the insurance company.

Also, if your policy allows you to make a partial withdrawal, the death benefit will decrease and can only be repaid with premium payments toward insurance cost. It cannot be repaid the same as a loan.

Since cash value life insurance works as a living benefit, policy owners can cancel or surrender the policy and receive the cash value in a lump sum. If you decide to cancel your policy in exchange for the surrender value, take into consideration that the terms of the contract will be nullified and your policy cannot be reinstated.

If you decide to buy a cash value insurance product, the cash value of your policy is not subject to income tax. Interest grows on a tax-deferred basis, and the policy’s death benefit is also tax-free, meaning your beneficiaries won’t have to pay taxes on the payout they receive.

What is the cash surrender value of a life insurance policy

The cash surrender value is the money you receive if you surrender the policy. 

Basically, this is when you cancel the policy and the interest grown on your account must be paid to you. As the cash value grows in your investment or savings account, it is tax-deferred, so you don’t have to pay taxes on it. But when it comes to surrendering the policy for the cash value or making a withdrawal, the issue of taxation becomes more complex. Some money taken from your cash-value account could be considered income.

If you surrender the policy, the cash value you receive is subject to income tax. If you make a withdrawal or a partial surrender, the amount you withdraw over premiums paid is taxable. For example, if the cash value of your life insurance policy has grown to $10,000, and you’ve paid $5,000 in premiums, and you make a withdrawal of $6,000, you will have to pay income tax on $1,000.

Life Insurance Policies with a Cash Value Component

All permanent life insurance policies are types of cash value life insurance

With a permanent life insurance policy, your beneficiaries will have the assurance of a death benefit to cover funeral costs, estate taxes, and any other financial obligations. You can use it like an individual retirement account (IRA) or supplemental retirement income during life, and the death benefit gives you the security of a financial legacy to pass down to your family. 

Let’s further examine the different types of permanent life insurance policies that grow cash value.

Whole Life Insurance

Whole life insurance, or fixed life, is the most inflexible type of permanent life insurance policy. The policy owner is guaranteed a fixed death benefit, a fixed rate of premium, and a minimum interest rate of growth on the cash value. 

Life insurance companies that offer permanent life insurance have different types of cash value. In whole life insurance, the premiums collected are put into the insurance company‘s general account. From the general account, the life insurance company deposits the premium that goes toward the coverage amount, the cost of insurance, or business expenses, and the investment and savings funds. 

From the general account, whole life insurance cash value grows at a minimum rate. If there are losses in the insurance company‘s investment, the insurer accepts all the risks, and the cash value of the policy will continue to grow at that minimum rate. These funds are only available through loans or partial or full surrenders. 

Partial surrender of a whole life policy is when you forfeit a portion of the policy for cash value. Then, the death benefit is reduced by the proportion of the surrender. 

For example, you have a whole life insurance policy with a death benefit of $50,000. If you surrender $10,000 of the policy, your death benefit reduces to $40,000. Your premiums will be reduced, and you’ll receive the cash value of the $10,000 that was surrendered.   

Whole life insurance has fixed premiums, guaranteed death benefits, and investment safety.

Universal Life Insurance

Universal life insurance is more versatile than whole life insurance because policyholders can increase or reduce their premiums and death benefits (subject to insurability) and allow cash value to pay their premiums. 

A universal life policy uses investment accounts to build cash value. Different from other permanent life policies, universal life insurance does not have typical nonforfeiture options. Life insurance companies use nonforfeiture options to prevent a lapse in the policy due to non-payment and to stop loss of cash value. This is because universal life policies will not lapse as long as there is enough cash value in the investment account to cover the premium. 

Additionally, universal life policies have a minimum interest rate guarantee, even with fluctuating market conditions. The cash value interest rate is fixed and will not fall below minimum interest. The life insurance coverage of the policy remains fixed as well. 

With a universal life policy, instead of taking out a loan on the policy, policyholders make withdrawals from the cash value. Unlike loans, the withdrawal in a universal life policy does not grow interest. Instead, the withdrawal reduces the policy’s death benefit and cash value dollar for dollar of the withdrawal. A withdrawal cannot be paid back like a loan and is recovered through premium payments. The flexibility of universal life policies makes it a unique insurance product.

Variable Life Insurance

Another type of permanent life insurance policy is variable life insurance. The cash value of variable life insurance grows in investment sub-accounts similar to mutual funds

The policyholder owns these sub-accounts, not the insurers. The insurance company offers a minimum death benefit but not a minimum interest rate. Therefore, cash value is not guaranteed, and the death benefit and the cash value change with market performance, though the death benefit will not drop below the minimum guarantee. 

The premiums for variable life insurance remain the same, and the cash value of the policy is used to pay them. To mix things up in the world of insurance, the characteristics of a variable life policy and a universal life policy are combined to form a variable universal life policy. With these types of policies, premiums are placed into sub-accounts, and the policy owner can increase or decrease the death benefit and premium. 

Term Life Insurance 

Policies that end by a certain time or when the policyholder reaches a certain age are called term life policies. These policies don’t usually have a cash value component. The exception to this rule is an endowment life policy. 

Endowment policies combine term life insurance with a separate savings account. Money paid for premiums is divided between the insurance policy and the savings plan. When the policy reaches its term, you will receive a payout called an endowment. 

If you’re not interested in a savings component, another way to get around being empty-handed at the end of a term policy is to attach a return-of-premium rider. The rider allows the insured to have all premiums returned if they outlive the policy term.

Cash value life insurance can be difficult to understand and even harder to choose. By using Insurify to compare life insurance quotes, you’ll quickly be able to compare life insurance premiums to decide which policy is your best investment.

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How to Borrow from Your Life Insurance Policy

To find out the step-by-step process your insurance company uses for you to borrow from your life insurance policy, contact your insurance agent or the company directly.  

Frequently Asked Questions: Cash Value Life Insurance

What is cash value life insurance?

Cash value is an element in life insurance policies that uses a part of your premiums to grow in interest or by market value in a savings or investment account.

What kind of life insurance policy generates cash value?

Permanent life insurance policies build cash value. Since the policy is for life, having a component to act as a savings or investment can be useful in times of need and is an actual living benefit.

Can you borrow against a life insurance policy?

Yes, you can borrow against your life insurance policy's cash value. Be aware that loans incur interest that can be subtracted from your death benefit if the loan is not repaid by the time of your death. The outstanding loan can also be deducted.

Does term life insurance have a cash value?

Typically a term life insurance policy does not have living benefits, like a cash value component. Usually, benefits are only paid out if you pass away during the term. An endowment policy is a type of term life insurance that puts a portion of your premiums in a savings account. If the policy term reaches maturity and you’re still alive, you will receive a payout called the endowment.

Is the cash value of life insurance taxable?

Cash value in life insurance grows on a tax-deferred basis. Upon making withdrawals, surrendering the policy, or partially surrendering the policy, the money you receive may be taxed as income. If your withdrawal is less than your total premiums paid from the accumulated cash value, the money from your withdrawal is not taxable.

Buying the Best Life Insurance Policy

With so many life insurance companies and types of policies, it may seem like it’s impossible to compare them all. But with Insurify, you can evaluate the difference in policies and prices all in one place. By using the Insurify website, you have one stop to help you compare policies that fit your insurance needs at the right price.

Updated April 14, 2021

Aissa Martell is a licensed insurance producer in the State of New York. She is a creative writer and has been freelance writing for five years. She’s happy to share her knowledge of the insurance industry and its products.