Home Life insurance What is cash value life insurance and how does it work? What is cash value life insurance and how does it work? Cash value life insurance is a permanent policy that offers a savings-like component in addition to the death benefit. The money can only be used by the policyholder while they are alive. Written by Desiree Ghazi Reviewed by Nupur Gambhir Nupur Gambhir Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service. Updated on: August 23, 2024 Why you can trust Insure.com Quality Verified At Insure.com, we are committed to providing the timely, accurate and expert information consumers need to make smart insurance decisions. All our content is written and reviewed by industry professionals and insurance experts. Our team carefully vets our rate data to ensure we only provide reliable and up-to-date insurance pricing. We follow the highest editorial standards. Our content is based solely on objective research and data gathering. We maintain strict editorial independence to ensure unbiased coverage of the insurance industry. There are significant differences between term life insurance and the multiple types of permanent life products like whole life and universal life. The cash value in permanent policies is one of them. Whole life and universal life policies offer this benefit, but term life policies don’t. The trade-off for cash value life insurance is that you’ll pay a higher premium for coverage. Getting this type of life insurance makes sense for some consumers, but most people are better off purchasing term life insurance. Here’s what you need to know about cash value life insurance to determine if it’s right for you. Key TakeawaysCash value life insurance policies offer guaranteed death benefit and tax-deferred growth on the invested part of the policy.If you don’t repay the loan taken against the cash value, it will be deducted from the death benefit that your beneficiaries get.It takes at least 10 years — if not more — for a policy to build enough cash value to be used. What is the cash value of life insurance? Cash value is the savings component attached to permanent life insurance policies like whole life or universal life. It can only be used by the policyholder when they are alive and does not contribute to the death benefit. When you have cash value life insurance, your premiums pay into two parts of your policy: The cash value Towards the cost of insuring you Because you are paying for the cash value and the death benefit, premiums are higher than they would be for a term life insurance policy where you only pay for the death benefit. What types of life insurance offer cash value? The main types of cash value life insurance are: Whole life: In whole life insurance, the cash value amount accumulates at a minimum guaranteed rate, which is fixed. You can accelerate the rate of accumulating cash value by pouring the company dividends into the policy. Universal life: Universal life insurance lets you use the cash value to pay for the policy premiums. The rate of cash value accumulation varies based on the interest rate decided by the insurance company. Variable life: In variable life insurance, the cash value increases based on your investments in the mutual funds offered by your insurance company. Cash value growth is not guaranteed. How does cash value life insurance work? When you get a whole life or universal life policy, you pay a premium on either a monthly or annual basis. The way the premiums are set varies: Whole life insurance policies have fixed premiums. Premiums for indexed universal life policies are more flexible. In an indexed universal life policy, you can pay a lower premium or skip premiums altogether if there’s enough cash value in the policy, says Sam Price, an independent agent with Assurance Financial Solutions. Your insurance company will apply part of your premium payments toward the death benefit and invest the other portion in the market. The latter part is what builds up cash value. You get the most benefit from cash value while you’re alive. You can use it to supplement your retirement income, pay down debt or cover certain expenses. Here are three ways you can use cash value: Pay your premiums: Most insurers will only allow you to do this after you’ve owned the policy for at least a year, but in reality, it takes decades to build up enough cash value to pay your premiums. If you go with a universal life policy, you could end up depleting all the cash value built up in the policy. Take out a loan against your policy: You can take out a loan against your cash value, which you’ll have to pay back with interest. The downside to this approach is that if you don’t pay back the loan, the amount will be deducted from the death benefit your beneficiaries receive. Partially or fully withdraw money from your policy: You can withdraw money outright from cash value life insurance. Doing this in a whole life insurance policy could reduce the death benefit by more than the amount you withdraw. In a universal life policy, it may reduce the death benefit on a dollar-for-dollar basis. For example, if you have a $250,000 policy and withdraw $25,000, your beneficiaries will only receive a $225,000 death benefit from your policy. Another important thing to remember about cash value life insurance is that you can’t surrender the policy in the initial years or you’ll lose value. QuickTake How to get life insurance if you're uninsurable Who's who on a life insurance policy The life insurance contestability period: What you need to know What happens to the cash value of my whole life insurance policy when I die? Is accidental death and dismemberment insurance right for you? How to find a lost life insurance insurance policy Comprehensive guide to life insurance: What it is and how it works How to make sure you have enough life insurance How to read your life insurance policy Life insurance riders: What they are and how they work Guide to life insurance for transgender applicants Understanding your life insurance policy options What is a life insurance beneficiary? Family caregivers guide to insurance: What you need to know How life insurance works for high-net-worth individuals Combination life insurance or long-term care: Make the right pick How to use your insurance to help your adult children Covid-19 and life insurance: What you need to know? 10 ways to save money on life insurance When to reassess your life insurance needs The basics of return of premium term life insurance Life insurance for new parents Guide to life insurance for children Life insurance for people with pre-existing conditions Can I change my insurance plan if I get pregnant? | Insure.com 5 questions to ask before you buy term life insurance Life insurance trusts for child beneficiaries The most expensive medical conditions for life insurance buyers Using life insurance to fund retirement The most common mistakes people make when choosing their life insurance beneficiaries What to do if you get declined for life insurance The advantages of survivorship life insurance policies Life insurance for people with risky occupations What is guaranteed issue life insurance? What is an accelerated death benefit rider and how does it work? What is a contingent life insurance beneficiary? Life insurance for women Can you avoid estate taxes with a life insurance trust? What are per capita and per stirpes life insurance beneficiaries? Why it’s important for mothers, especially single mothers, to have life insurance Do I need a life insurance trust? What is an irrevocable life insurance beneficiary? How to buy life insurance Life insurance for parents How does the life insurance underwriting process work? How much life insurance do you need? Combination life insurance merges long-term care with your policy What is simplified issue term life insurance? Is life insurance taxable? How to convert a term life policy to permanent life insurance Life insurance tax surprise: The unholy trinity How life insurance rates are determined How to do a needs analysis before you buy life insurance Sports that could knock you out of contention for life insurance Variable life and variable annuity sub-accounts: The more the merrier? See more > When is cash value life insurance a good idea? Cash value life insurance can be a wise investment if you can afford the higher premiums. However, you will usually see higher returns if buy term life insurance and invest the rest. This avenue means you’d take advantage of the lower premium term life insurance offers for a set period of coverage, typically up to 30 years. You’d then invest the cost savings in the stock market. Pros and cons of cash value life insurance While there are some benefits to a cash value life insurance policy, there are also a lot of drawbacks. AdvantagesDrawbacksEligible to borrow against the cash valueMore expensive out-of-pocket premiumsThe cash value amount is tax-deferred if it is less than or equal to what you paid for the policy, but any amount greater than that is taxableThe interest and unpaid policy loans are deducted from your guaranteed death benefit, while withdrawals from the cash value reduce the death benefitProvides coverage for your entire lifeVery limited investment options with a very low rate of return If you’re weighing your life insurance options, consider whether you can afford the substantial premiums that come with a cash value life insurance policy. Cash value life insurance is usually only worth considering if you’ve maxed out other retirement accounts or want to invest with less risk than the stock market. How long does it take for whole life insurance to build cash value? You should expect at least 10 years to build up enough funds to tap into whole life insurance cash value. Talk to your financial advisor about the expected amount of time for your policy. Remember that the government taxes those funds. Another option in many cash value policies is that you can take out a loan against your policy. However, you’ll have to pay interest. Tapping into cash value is a potential revenue source in retirement. Just weigh the benefits and drawbacks and see if there’s another revenue source where you could get funds. Does term life insurance have a cash value? Term life insurance does not have a cash value, which makes it a lot cheaper than permanent policies. The premium paid towards a term life insurance policy only pays for the death benefit. The simplicity and affordability of term life insurance policies makes it the best choice for most people. You should talk to an agent to discuss your life insurance needs so you get the right policy for your situation. Frequently asked questions Is cash value life insurance a good investment? According to financial advisors, cash value life insurance is not a good investment until you have maxed out other investment and savings accounts. However, if you need a life insurance policy that lasts for life and have already made the maximum contributions to your tax-deferred retirement accounts, then it might be worth considering. Does whole life insurance build cash value? Yes, whole life insurance does build cash value. The accumulated cash value can be accessed only by the policyholder while they are alive. Does every life insurance policy have cash value? Not all life insurance policies offer a cash value. While some permanent life insurance policies have a cash value, term life insurance policies do not. Sources:Insurance Information Institute.” Whole life insurance .”Accessed June 2022. Insurance Information Institute.” How does cash value work.”Accessed June 2022. × Get Free Life Insurance Quotes Today! Zip Code Please enter valid zip Age Age 16 – 20 21 – 24 25 – 34 35 – 44 45 – 54 55 – 64 65+ Coverage Amount Coverage Amount $50,000 – $100,000 $100,000 – $200,000 $200,000 – $300,000 $400,000 – $500,000 $500,000 – $1,000,000 $1,000,000 – $2,000,000 $2,000,000 – $5,000,000 $5,000,000+ Coverage Type Coverage Type Whole Life Term Life Final Expense Not Sure Gender Gender Male Female Non-Binary Tobacco Use Yes No Compare Quotes Related Articles Term Life Insurance Index: Sales rise by 1% in Q2, reaching record high By Nupur Gambhir How much term life insurance costs By Huma Naeem The 10 largest life insurance companies By Chris Kissell How to get life insurance if you’re uninsurable By Penny Gusner What to avoid before the life insurance medical exam By Desiree Ghazi Life insurance for people with dementia By Satta Sarmah-Hightower On this page What is the cash value of life insurance?What types of life insurance offer cash value?How does cash value life insurance work?When is cash value life insurance a good idea?Pros and cons of cash value life insuranceHow long does it take for whole life insurance to build cash value?Does term life insurance have a cash value?Frequently asked questions ZIP Code Please enter valid ZIP See rates