What Is Cash Value Life Insurance?
Cash value life insurance combines lifelong death benefit protection with a tax-deferred savings account that grows over time.
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Written byAmy Beardsley
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3+ years writing about auto, home, and life insurance
7+ years in personal finance and technology
Amy specializes in insurance and technology writing and has a talent for transforming complex topics into easy-to-understand stories.
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Edited byKatie Powers
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Licensed auto and home insurance agent
3+ years experience in insurance and personal finance editing
NPN: 20564519
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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Table of contents
Cash value life insurance combines permanent life insurance with tax-free savings.[1] Part of every premium payment goes into a savings account, creating funds you can access through cash value loans, withdrawals, or future premium payments.
If you die, the insurance company will keep your entire cash value amount and only pay out the death benefit. And if you borrowed against your policy, any amount you still owe can reduce that death benefit even further.
Here’s what you should know about cash value life insurance policies, including how they work and whether they’re the right fit for your financial situation.
Quick Facts
Cash value is a feature of permanent life insurance, not a stand-alone policy type.
Most early life insurance payments go toward administrative costs.
Policy loans against your cash value charge interest.
What is cash value life insurance, and how does it work?
Cash value life insurance is permanent life insurance. Unlike term life insurance that disappears after 10, 20, or 30 years, cash value policies stick around for life as long as you keep paying the premiums. This coverage is available in three main options: whole life, universal life, and variable life.
Part of your premium goes into a side account each time you make a payment. The rest covers the actual cost of your insurance policy, and another chunk goes to administrative fees. The account grows tax-deferred, which means you don’t pay taxes on it until you withdraw more than the total premiums you’ve paid into the policy.[2]
This sounds like a nice perk, but the insurance company keeps any cash value when you pass away. Your family won’t get both the death benefit and the cash value.[3]
Important Terms to Know
Policyholder: The person who owns the life insurance policy and pays the premiums.
Beneficiary: The person who receives the death benefit when the policyholder dies.
Surrender value: The cash surrender value is what you’d get if you cancel your policy entirely. It’s typically less than the policy’s cash value due to surrender fees and charges.
How the cash value grows
Because insurers front-load administrative fees, early growth is often minimal. Plan to wait at least two years before you touch any cash value.[4]
Some whole life policies pay dividends, but the accumulation you see depends on your policy type. Whole life policies earn interest at rates the insurer sets each year. Universal life policies guarantee a minimum rate with higher cash value growth potential. Variable life policies let you choose investment options, but they add risk because the growth depends on the investment value.[5]
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Types of cash value life insurance policies
You’ll want to carefully choose the type of cash value policy you buy. Each policy type works differently, and the right match for you should align with your long-term goals.
Here’s how the main types compare.
Factor  | Whole Life | Universal Life | Variable Life | Indexed Universal Life |
|---|---|---|---|---|
| Premium flexibility | Fixed | Flexible | Flexible | Flexible |
| Growth method | Interest rate set by insurer, sometimes with dividends | Interest rates tied to the insurer’s general account performance | Investments into stocks, bonds, and funds | Tied to stock index performance |
| Guarantees | Death benefit and cash value growth | Minimum interest rate | Variable death benefit and no guaranteed cash value | Death benefit and cash value growth |
| Risk level | Low | Low to moderate | High | Moderate |
| Best for | Conservative savers seeking predictability | People who want some flexibility with moderate guarantees | Aggressive investors who are comfortable with market risk | People who want market participation with some protection |
If you continue making premium payments, whole life insurance coverage can last your entire lifetime. One of its standout features is the fixed premium. Your premiums always stay the same, no matter how long you keep the policy.[6] The cash value portion builds slowly over time. The cash value accumulation grows on a set schedule, giving you access to funds.
Unlike whole life coverage, universal life insurance premiums don’t stay the same. You might pay more or less, depending on how much cash value is available. The death benefit protection is also adjustable, which means you can match it to changing life circumstances.
Cash value growth depends on the insurer’s investment performance, but it also has a guaranteed minimum interest rate.
Variable life insurance gives you long-term protection along with investment choices. The cash value invests into sub-accounts that function much like mutual funds, giving you the potential for higher returns. But it also comes with significant risk due to market fluctuations. How much you earn comes down to active management and risk tolerance.
Indexed universal life insurance uses interest credits to build cash value. Instead of putting your money directly in the stock market, the insurer measures how a market index, like the S&P 500, performs. Your cash value grows based on the interest credits. It opens you up to risk, but policies have built-in minimum interest rates for protection.[7]
Cost of cash value life insurance policies
Cash value life insurance costs more than term, but it offers lasting protection and an extra savings feature.[8] A 25-year-old woman pays an average of $64 per month for $250,000 in whole life insurance coverage, while a 25-year-old man pays $69 for the same amount of protection, according to data from SelectQuote.[9]
Universal and variable life insurance can land on either side of these sample prices, depending on policy specifics and the coverage you choose.
Factors that affect the cost of cash value life insurance policies
How much you pay for cash value life insurance largely depends on the following factors:
Age
The younger you are when you buy life insurance, the less you’ll pay.
Health
Good health often results in lower premiums.
Coverage amount
A higher policy limit equals a higher premium payment.
Payment period
You can choose to pay premiums for your entire life or for a limited time (like 15 years). Shorter payment periods mean higher annual premiums.
Policy type
Policies with more guarantees and features typically cost more than basic policies with fewer protections.
Riders
Add-ons, such as disability waivers and long-term care benefits, increase insurance costs.
Insurer dividends
Dividend payments can reduce your out-of-pocket costs over time.
Life insurers take a close look at age and health when calculating your premium. It’s smart to lock in coverage when you’re in your 20s or 30s, as you get the best growth potential and the lowest possible premiums.
How to use your policy’s cash value
Your policy’s cash value is money you can actually use, though you’ll need to follow specific rules about accessing the funds.
You have four main ways to use your accumulated cash value:
Policy loan: Loans let you borrow against your cash value. Note that unpaid balances accrue interest and reduce your death benefit.
Partial withdrawal: Take out some cash directly from your account. Policy withdrawals up to the total premiums paid are typically tax-free, but anything beyond is subject to tax treatment.
Premium payment: Use your cash value to cover premium costs instead of paying out of pocket.
Full surrender: You can cancel the entire policy and get the full cash value minus any surrender charges, but this terminates coverage entirely.
Remember that unpaid policy loans directly reduce what beneficiaries receive. Consider their needs first when making these decisions.
How loans and withdrawals affect death benefits
Taking money from your policy creates consequences for your loved ones. Outstanding loans and withdrawals shrink the death benefit dollar for dollar. For example, if you owe $10,000 when you pass away, your family receives $10,000 less.
If you can’t afford to make loan payments alongside premiums, your policy could lapse, leaving your family with nothing. Plus, policy lapses often trigger taxable events on any gains.
Pros and cons of cash value life insurance
Cash value life insurance is like getting two products in one: life insurance protection and a savings account. But this combo costs more than buying these products separately.
Pros
Permanent coverage
Tax-deferred growth
Guaranteed returns
Flexible access to funds
Cons
Higher premiums
Complex fees
Hands-on monitoring and management
Loans that reduce your family’s benefits
Cash value vs. term life insurance: Which is right for you?
The cost gap between cash value and term life insurance is eye-opening. A 35-year-old female pays an average of $9 per month for $250,000 in 10-year term insurance coverage, while the same whole life policy costs $91, according to example quotes from SelectQuote. For males, the difference is similar: $10 per month compared to $103 per month.[10]
A term policy offers budget-friendly rates but provides temporary protection. Cash value policies are more expensive but provide permanent coverage with built-in savings. Your personal financial-planning goals and life circumstances determine which policy type is best.
Cash value life insurance may be a good fit for the following:
High earners who’ve maxed out 401(k) and individual retirement account (IRA) contributions
Families with lifelong dependents, like special-needs children
Estate-planning strategies requiring permanent coverage
People who want guaranteed lifelong protection regardless of future health changes
Term life insurance may be a good fit for the following:
Budget-conscious families needing maximum coverage at the lowest cost
Temporary needs, like a mortgage or income replacement during working years
People with access to employer retirement-planning benefits and other investment vehicles
People who prefer to “buy term and invest the difference” in higher-return investments
Save on Life Insurance
Find a policy for 50% less when you compare through SelectQuote
How to buy a cash value life insurance policy
Purchasing cash value life insurance is simple, but you can potentially save money and time by doing your homework beforehand.
Here’s how to navigate the buying process:
Assess your goals, needs, and budget. A life insurance calculator can tell you how much coverage you need. Then, decide if permanent protection makes sense for your wealth-management goals.
Get multiple quotes. Compare prices and policy features from at least three highly rated insurance companies.
Review policy terms and fees. Carefully review surrender charges, administrative costs, and investment options.
Complete an application. Answer health questions honestly. You may need to complete a medical exam as part of the process.
Pay your premiums. This activates coverage once the company approves your application.
Review annually. Make sure your policy still meets your needs and financial goals.[11]
Cash value life insurance FAQs
Cash value policies generate plenty of questions since they’re more complex than term coverage. The following information can help answer your remaining questions.
Is whole life insurance a scam?
No. Whole life insurance isn’t a scam. It’s a legitimate financial product that can come with high fees and complex features that may not fit everyone’s needs.
Are cash value life insurance policies worth it?
Cash value policies make sense for specific long-term financial planning situations. They blend permanent protection with a growing, tax-sheltered savings component you can access when needed.
What happens to your policy’s cash value when you die?
The insurance company typically keeps the cash value and only pays the death benefit to your beneficiaries, essentially pocketing the savings you’ve built up.
Can you withdraw your cash value from life insurance?
Yes. You can withdraw or borrow against your cash value, but withdrawals permanently reduce your death benefit protection, and loans accrue interest that affects coverage.
What are the disadvantages of cash value life insurance?
High premiums, complex fee structures, frequent policy management, and the loss of cash value upon death are the main drawbacks to consider when buying cash value life insurance.
Sources
- National Association of Insurance Commissioners. "What Type of Life Insurance Is Right for You?."
- Texas Department of Insurance. "Life insurance guide."
- South Carolina Department of Insurance. "What happens to the cash value in my policy when I die?."
- Department of Veterans Affairs Insurance Service. "Whole Life vs. Term Fact Sheet."
- Washington State Office of the Insurance Commissioner. "Types of cash value life insurance."
- Insurance Information Institute. "Insurance Handbook."
- Annuity.org. "Fixed Index Annuities vs. Indexed Universal Life Insurance (IUL)."
- Insurance Information Institute. "Reasons to purchase permanent life insurance."
- SelectQuote. "What is whole life insurance?."
- SelectQuote. "Life Insurance Quotes."
- Insurance Information Institute. "8 smart steps for buying life insurance."
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Amy BeardsleyInsurance Writer
Amy is a personal finance and technology writer. With a background in the legal field and a bachelor's degree from Ferris State University, she has a talent for transforming complex topics into content that’s easy to understand. Connect with Amy on LinkedIn.
Amy has been a contributor at Insurify since September 2023.
Licensed auto and home insurance agent
3+ years experience in insurance and personal finance editing
NPN: 20564519
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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