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Cash value life insurance is a type of permanent life insurance that provides a range of benefits, including a death benefit for your beneficiaries. It provides financial stability for loved ones, allowing them to maintain their standards of living after you pass away.

As an added bonus, permanent life insurance policies have accumulated cash value that grows over time.[1] You can use the cash value for various purposes, like providing supplemental income in retirement or paying for major expenses, making it a way to invest in your future and build financial security for yourself and your family.[2]

How cash value life insurance works

Term life insurance pays a death benefit amount but doesn’t come with a cash value component, according to the Insurance Information Institute. Permanent life insurance, by comparison, can provide both death benefits and accumulated cash value savings by combining an investment component with a life insurance policy.

As you pay your policy premiums, the insurance company separates the payment into separate “buckets.” Part of the money goes toward the death benefit, and another part goes toward building cash value in your policy. A small portion also goes toward the insurer’s operating costs and fees.[3]

The cash value component accrues over time and grows tax-deferred, according to the National Association of Insurance Commissioners (NAIC).[4] The money in the cash value account grows tax-free until you withdraw the funds. If you’re thinking about withdrawals from your life insurance policy, talk to a financial advisor or tax specialist to discuss potential tax consequences.

See More: Types of Term Life Insurance

Can I borrow money from my life insurance policy?

As your cash value grows, you can use it to pay premiums or borrow against it for other expenses. You may borrow from your cash value life insurance policy if you need quick access to funds and want to avoid taking out a loan. You can use it for various purposes, such as medical bills, home improvement projects, and college tuition expenses.[5]

The process is relatively simple and doesn’t rely on credit checks. The exact steps for borrowing vary depending on your life insurance company, but you usually begin the process by contacting your insurance agent or broker to ask for the loan. You aren’t removing money from your cash value account. Instead, the insurer gives you a loan, using the cash value as collateral.

For example, suppose Linda wants to borrow from her cash value life insurance policy to help fund a down payment on a house. She submits a request in writing and receives the money in her bank account. She’ll make payments to repay the balance and any interest charges, until she pays it off.

However, Linda must consider the drawbacks before borrowing from her life insurance policy. Her insurer could cancel the policy if she doesn’t make payments on time. And if she doesn’t repay the loan before she dies, her beneficiaries could receive a reduced death benefit.

Cash value and taxes 

Cash value life insurance policies grow tax-deferred, so you won't typically need to pay taxes on gains. The money you withdraw from the policy isn’t usually taxable unless you take out more than the premiums you paid. If you sell the policy or surrender it for cash value while you’re still alive, you’ll likely have to pay taxes on any gains you made.

Important Information:

Your beneficiaries receive life insurance death benefits tax-free, according to the IRS.[6] This means that when you pass away, your loved ones will receive the full amount of the life insurance death benefit without having to pay any taxes on it.

Learn More: Life Insurance and Taxes: Everything You Need to Know

Types of cash value life insurance 

A policy that provides a cash value component can be an important part of your financial portfolio. But “cash value” isn’t a type of life insurance you can buy. Instead, it’s a feature that’s built into different types of life insurance policies.

A variety of cash value life insurance policies are available, each with unique features and benefits:

  • Whole life insurance: This coverage provides life insurance for your whole life. Insurance companies guarantee death benefits and return rates on cash values. The premium payments will also never increase as you age.

  • Universal life insurance: A type of permanent life insurance with flexible premiums, universal life insurance lets you pay more when you have extra cash or less if you don’t. You’ll usually earn a guaranteed minimum interest rate, with some exceptions.

  • Variable life insurance: This life insurance policy lasts for your entire lifetime. The insurer invests your cash value into separate accounts, but you can choose the investments. The cash value and death benefit aren’t fixed. Instead, the value changes due to changes in the value of the individual accounts.

  • Variable universal life insurance: This type of permanent life insurance combines a flexible premium with a range of investment options. Variable universal life insurance makes it possible to increase the policy’s cash value by making a lump-sum payment.

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Pros and cons of cash value life insurance 

Cash value life insurance has several pros and cons. One of the main benefits is that it doesn’t have a term limit, meaning it provides a death benefit to your beneficiaries no matter when you pass away. It also has the potential for tax-deferred cash value accumulation, which you can use as a source of savings or as collateral for loans.

Cash value life insurance is generally more expensive than term life insurance, and the low interest rates for a cash value policy may grow slower than other investment options. Furthermore, if you cancel the policy or let it lapse, you may not receive the full amount of your cash value.


  • Guaranteed death benefit

  • Tax-deferred growth

  • Ability to borrow against it


  • More expensive than term life insurance

  • Low interest rates can slow down cash value growth

  • Could lose some of your cash value if you cancel the policy or let it lapse

Learn More: How Much Life Insurance Do I Need?

How to find the right cash value life insurance policy

To ensure that you get the right life insurance policy, you should consider several factors:

  • Coverage amount: Determine the coverage you need to ensure that your beneficiaries will be taken care of in the event of your death.

  • Premiums: Compare the premium costs for different policies to ensure you purchase a policy that fits your budget.

  • Cash value growth: Consider the potential for cash value accumulation and compare the projected growth rates for different policies.

  • Policy riders: Some policies offer additional benefits like accidental death coverage, critical illness coverage, and more.

  • Company's financial stability: Look into the insurance company's financial strength and claims satisfaction to ensure it can pay out claims in the future.

It's also important to shop around, get quotes, and compare your options before buying a policy to ensure you get the best deal. You should also read the policy's fine print and ask questions if you don’t understand the terms and conditions before making a decision.

Learn More: 10 Largest Life Insurance Companies

Cash value life insurance FAQs

Shopping for life insurance comes with many uncertainties. Here are answers to some of the top questions about cash value life insurance. 

  • Cash value in life insurance refers to the savings component of a permanent life insurance policy. With this feature, the policyholder can accumulate savings by paying premiums. The cash value component can grow over time and be used as a savings account or as collateral for loans.

  • The cash surrender value of a life insurance policy is the amount of money that the policyholder can receive if they decide to cancel or "surrender" the policy before it matures or the insured person passes away. The insurance company deducts fees or unpaid loans and premiums from the total amount.

  • Cash value policies let you cash in life insurance while you’re still alive. If you withdraw funds by taking a loan against your policy, the funds aren’t usually taxable unless you surrender the policy before repaying the loan.[7] When surrendering your policy for cash, you’ll also pay taxes on any gain you might have earned.

  • Cash value life insurance can be a good fit if you want a guaranteed death benefit from a permanent policy. It can also be worth it if you’re looking to build cash value over time and want the option to borrow against your policy in the future. If you prioritize low cost coverage, term life insurance may be a better fit than a cash value policy.

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  1. Insurance Information Institute. "What are the principal types of life insurance?." Accessed January 30, 2023
  2. Office of the Insurance Commissioner Washington State. "Types of cash value life insurance." Accessed January 30, 2023
  3. New York State. "How The Cost Of Life Insurance Is Determined." Accessed January 30, 2023
  4. National Association of Insurance Commissioners. "Life Insurance." Accessed January 30, 2023
  5. Life Happens. "Permanent Insurance." Accessed January 30, 2023
  6. IRS. "Frequently Asked Questions: Life Insurance & Disability Insurance Proceeds." Accessed January 30, 2023
  7. Texas Department of Insurance. "Life insurance guide." Accessed January 30, 2023
Amy Beardsley
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.